ECJ ruling expected regarding German denial of tax-neutral dividend payments

The European Court of Justice is to rule whether German denial of withholding tax exemption in certain cases breaches EU Parent-Subsidiary directive.

A German subsidiary of the Danish Juhler Holding A/S, an international recruitment agency with 35 offices in Europe and Asia, has been denied by German tax authorities to pay tax-free dividends to its parent company. The EU Parent-Subsidiary directive provides for the payment of dividends from a subsidiary to its parent without any withholding tax to be applied in the country of the subsidiary.

The German tax legislation actually confirms the provisions of the EU Parent-Subsidiary directive only insofar as resident holding companies are concerned, a condition that does not take place in the EU Parent-Subsidiary directive.

The Germany tax authorities ruled in the case of the German subsidiary of Danish Juhler Holding A/S that withholding tax has to be paid by the German subsidiary on its dividend payments to the Danish parent company. The justification of the German tax authorities was based on the arguments

  • that there are no economic or other substantial reasons for the involvement of the parent company,
  • that the parent company does not earn more than 10 % of its entire gross income for the financial year in question from its own economic activity, and
  • that the parent company does not take part in general economic commerce with a business establishment suitably equipped for its business purpose.

Legal Challenge of German Tax Ruling by Danish Parent Company

The Danish parent company challenged the decision of the German tax authorities in front of the German courts. In November 2016, the German Finance Court Cologne sent a request to the European Court of Justice for a preliminary ruling whether respective provisions of the EU legislation preclude national legislation.

The request for a preliminary ruling by the ECJ was published in the Official Journal of the European Union on 03 April 2017.

The preliminary ruling of the European Court for Justice is expected with big interest as it may finally stop the long-years practice of Germany to curtail the freedom of movement within the EU.

Cyprus: All Relevant EU Directives Fully Implemented in Cyprus

Other than Germany, Cyprus is one of those few EU member states that fully implemented all EU directives and EU legislation granting free and unrestricted movement of individuals, businesses and services and capital within the EU, such as for example the EU Directive on Freedom of Movement, the EU Parent-Subsidiary Directive and others.

Shanda Consult may be able to assist you benefiting from the provisions of EU legislation aiming to enhance the EU as a single market. For further information or for consulting through our tax experts, please contact us.