German Newsletter
TAX
Inbound-Structures – Relief from German withholding tax upon request – Substance criteria and electronic submission of applications
At a glance
The new version of the German „Anti-Treaty ShoppingRule“ is complex and subject to discussions and disputes. The provision mainly applies to foreign corporations that receive dividends and royalties from Germany (so-called inbound structures). Under the Anti-Treaty Shopping Rule, the relief from German withholding tax is essentially only possible if the foreign corporation meets certain substance criteria.
Further, any refund and exemption applications by foreign corporations must in principle be submitted electronically as of 1 January 2023.
Background
Dividend and royalty payments from a German corporation to a foreign shareholderare subjectto withholdingtax in Germany even if relief conditions undera Double Tax Treaty (DTT) or a EU-Directive are met.
In order to eliminate double taxation under the relevantDTT the foreign corporation may either(1) obtain a refund of the withholding tax based on a refund procedure application. Alternatively, the German corporation may before the dividend or license fee payment (2) apply for an exemption certificate. Once such exemption certificate is obtained paymentcan be made withoutwithholdingtax obligation. Both the refund procedure and the receipt of
I.TAX
1. Inbound-Structures – Relief from German withholding tax upon request – Substance criteria and electronic submission of applications
Page 6
2. Germany Transparency Register: Reporting obligation for foreign companies with existing properties in Germany
Page 7
3. Act on the Modernization of Tax Procedure Law –in particular the Acceleration of Tax Audits
Page 8
II.LAW
1. Whistleblower Protection Act
Page 9
an exemption certificate require an application by the foreign corporation with the German Federal Central Tax Office (Bundeszentralamt fürSteuern or “BZSt”). In order to avoid cases of abuse in particular by interposition of shareholdingcompanies (e.g., application by an intermediary EU letterbox company, because the ultimate shareholderis not entitled to apply for Double Tax Treaty or EU-Directive benefits), the application underGerman Anti-Treaty ShoppingRule requires the fulfilmentof certain substance criteria.
Substance criteria
The foreign corporation as shareholderhas a claim for relief from German withholdingtax if at least the conditions of one of the followingfouralternatives are met (simplified overview):
1. The source of income from Germany has a significant
connection with an economic activity of the foreign company (so-called material entitlementto relief). In addition, the economic activity must be carried out with a business
or
operation appropriately set up for the business purpose. A socalled passive holdingcompany (pure generation of dividend and royalty income, transfer to shareholders) is not considered to carry out an economicactivity.
2. The shareholders of the foreign corporation would be entitled to relief underthe same provision in the case without interpositioninga intermediate shareholdingcompany (so-called personal entitlementto relief) and carries on own economic activities. The fact that it must be the same provision, follows from the explanatory memorandum to the law. It is also clear from the explanatory memorandum to the law that it is not sufficientif theirshareholders are only personally entitled to relief, they must also carry on an own economicactivity.
or
3. The foreign corporation itself is listed on the stock exchange (socalled stock exchange clause). According to the explanatory memorandum to the law, the fact that a shareholderof the foreign corporation is listed on the stock exchange is now only sufficientif itwould be entitled to relief underthe same provision in the eventof direct purchase.
or
4. The foreign corporation succeeds in proving evidence that none of the main purposes of its interposition is to obtain a tax advantage (so-called counter-evidence).
Electronic Submission of applications
As of 1 January 2023, the refund application as well as the application for an exemption certificate must in principle be submitted electronically. Forthe data’s electronictransmission, registration with the so-called BOP procedure (i.e., the “BZSt”’s online portal) is necessary. According to unofficial information, however, there is an „internal grace period“until the end of June 2023 (no official letterof the German Federal Ministry of Finance), during which a submission in paper form should still be accepted However, since the textof the law requires electronicsubmission from 1 January 2023 for risk prevention a paper submission should only be made in exceptional cases and in close consultation with a tax advisor.
Outlook & Recommendation
In particular, corporate groups who are still in possession of an ‘old’ exemption certificate obtained before the new regulations came into force should check whetherthey also meet the substance requirements according to the current ‘new’ regulations for ensuringthat dividends / royalty payments from Germany can be made withoutwithholdingtax obligation.
Germany Transparency Register: Reporting obligation for foreign companies with existingproperties in Germany
At a glance
As mentioned within a previous Newsletterthe obligation to report beneficial owners/ fictious beneficialowners to the Transparency Registerwas introduced to all German companies as of 1 August 2021. In order to also cover foreign (non-German) structures, reporting obligations forforeign companies that have a direct or indirectinterestin German real estate were successively introduced. The newestregulation is subjectto an implementation deadline of 30 June 2023. Background is that trades in the German
real estate market are considered to be potentially exposed to money laundering. The aim of the legislatoris to ensure that it becomes transparent to whomreal estate property is attributable.
New regulation
Reporting obligations forforeign companies to the transparency registerhave been further extended as of January 1, 2023. The reporting obligation now also applies to foreign companies with existingreal estate in Germany.
This applies both to direct investments in real estate and to share deals in which shares in companies owning real estate were acquired in the past.
According to the German Federal Administrative Office, this obligation extends to all foreign legal entities to which shares in a company with domesticreal property are or (in the past) were directly or indirectly transferred.
As a relief, the legislatorhas provided that a reportingobligation does not apply if the companies concerned have already transmitted the relevantinformation on the beneficial ownerto another registerof a member state of the European Union. Consequences of an incorrect or missing report to the transparency register
Non-compliance with the above-mentioned reportingrequirements can resultin substantial fines. In addition, the German law provides for „naming-and-shaming“in the case of non-compliancecurrently, more than 1,200 decisions in this regard have already been published on the website of Federal Office of Administration in Germany.
From an practical point of view another relevantimplication is, that German notaries upon notarizingthe acquisition of German Real Estate or share acquisitions are obliged to confirm compliance with the transparency registerand not allowed to proceed with notarizations when transparency registerregistrations are outstanding/ incomplete or incorrect.