«Tax Alert. The EuGH-Dividendenumsetzungsgesetz: The Taxation of Dividends paid to Minority Shareholders and the new Withholding Tax Refund Regime. ...»
The EuGH-Dividendenumsetzungsgesetz: The Taxation of Dividends paid to Minority Shareholders and the new Withholding
Tax Refund Regime.
The European Court of Justice declared in its decision of 20 October 2011 1 The Taxation of dividends
(C-284/09 EU Commission v Germany) the German system for the taxation of paid to minority shareholders
(other than via investment funds). 2
dividends paid to minority shareholders which are subject to limited tax liabilOverview of the new ity and have their seat in other EU/EEA member states to constitute a viola- regulation
tion of European law. The results proposed by the German Conciliation
1.2 Provisions for shares Committee (Vermittlungsausschuss) on 26 February 2013 to the ‘Act To Im- acquired during the year......... 2 plement The Court’s Judgement From 20 October 2011 In Case C-284/09’ 1.3 Details with regard to (so called ‘Act for the Implementation of the ECJ Judgement on Dividends’) the 10% threshold requirement 4 have been approved by the Federal Parliament (Bundestag) on 28 February 1.4 Time scope of application
2013 and by the Federal Council (Bundesrat) on 1 March 2013.
1.5 Miscellaneous.......... 6 The compromise adopted provides that dividend income does not benefit 2 The taxation of dividends from the participation exemption regime but is fully subject to corporate in- paid to minority shareholders in the case of investments via investment come tax if the shareholder holds a participation of less than 10% of the dis- funds 7 tributing entity (‘minority shareholding’ – Streubesitzbeteiligung). To the conGeneral tax liability for trary, capital gains from the disposal of minority shareholdings are still tax- dividends received by the fund 7 exempt under Sec. 8b para. 2 of the German Corporate Income Tax Act 2.2 Exceptions for special (Körperschaftsteuergesetz – ‘CITA’). The amendments effectively only con-
The new provisions apply to all dividends paid to minority shareholders after 28 February 2013.
Further, a refund of withholding tax on dividends paid to non-domestic shareholders prior to 1 March 2013 will be granted according to a special procedure pursuant to the new Sec. 32 para. 5 CITA. Under certain circumstances the same procedure may be applied to dividends paid to qualified shareholders after 28 February 2013. In both cases, the Central Federal Tax Office (Bundeszentralamt für Steuern) is responsible for the refund.
1 The Taxation of dividends paid to minority shareholders (other than via investment funds)
1.1 Overview of the new regulation If at the beginning of a calendar year a shareholding represents less than 10% of the shares of a corporate entity, the dividends will now form part of the taxable income and will no longer be tax-free pursuant to Sec. 8b para. 4 sent. 1 CITA as amended by the new law (‘CITA n.v.’). The shares in the corporate entity must be held directly. It is not possible to take into consideration several shareholdings that are held indirectly (e.g. via a subsidiary, a controlled company or an investment fund). However, different shareholdings can be summarized at the level of the member of a partnership if the shareholding is held indirectly via the partnership.
1.2 Provisions for shares acquired during the year A participation of at least 10% acquired during the year is deemed to be acquired at the beginning of the calendar year (Sec. 8b para. 4 sent. 6 CITA n.v.).
Example I: On 1 April, A-GmbH acquires a 15% participation in XGmbH. On 15 May, X-GmbH distributes a dividend to its shareholders.
Solution: The 15% participation held by A-GmbH is deemed to be acquired at the beginning of the calendar year pursuant to Sec. 8b para.
4 sent. 6 CITA n.v. Thus, the dividend is tax-free pursuant to Sec. 8b para. 1 CITA. In our view, this retroactivity fiction does not apply for trade tax purposes (Gewerbesteuer), so that the dividend remains trade taxable.
For that purposes, the participation held at the beginning of the calendar year is solely relevant; i.e., the sale of a (partial) participation during the calendar year does not affect the fulfilment of the 10% minimum participation ratio.
Example II: On 1 April, A-GmbH acquires 15% of the shares in XGmbH. On 15 April, A-GmbH sells 10% of the shares. On 15 May, XGmbH effects a dividend distribution.
Solution: Pursuant to Sec. 8b para. 4 sent. 6 CITA n.v., the shares are regarded as being acquired at the beginning of the calendar year.
The dividends are tax-free regardless of the minority shareholding of Taxation of dividends from minority shareholdings and w/h tax refund | Issue 2/2013 2 A-GmbH held at the time of the distribution. In our view, however, the dividends remain taxable for trade tax purposes.
The new provision does not particularly provide a rule how to treat an increase of the participation to at least 10% during the year. Although in such case the shareholder holds a qualified shareholding at the time of the dividend distribution, pursuant to the wording of the law only the acquisition of a
package of at least 10% during the year (and not the increase to a participation of at least 10%) seem to benefit from the retroactivity rule:
Example III: On 1 January, A-GmbH holds a 8% participation in XGmbH. It acquires a further 4% participation on 1 March. A-GmbH receives dividends from X-GmbH on 15 May.
Solution: In accordance with the wording of Sec. 8b para. 4 sent. 6 CITA n.v., the retroactivity fiction does not apply to the additional 4% acquisition. Therefore the dividends are subject to corporate income taxation.
To the contrary, the acquisition of a further qualified shareholding leads to a
Example IV: On 1 January, A-GmbH holds a 8% participation in XGmbH. On 15 May, X-GmbH distributes a dividend. On 30 November, A-GmbH acquires a further 10% participation in X-GmbH.
Solution: The 10% shares are regarded as being acquired at the beginning of the calendar year. Thus, the requirements for a qualified shareholding are met regardless of whether A-GmbH only held 8% of the shares at the time of the dividend distribution. In our view, this applies also in case A-GmbH re-sells the qualified shareholding later during the year.
Furthermore, in our opinion the retroactive effect of Sec. 2 para. 1 of the German Reorganization Tax Act (Umwandlungsteuergesetz – ‘GRTA’) has
also to be taken into account:
A domestic entity is discriminated compared to an EU-entity because for the latter, Sec. 43b EStG only refers to the participation ration at the time of the distribution.
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1.3 Details with regard to the 10% threshold requirement Determination of the relevant threshold If the distributing entity does not have a share capital, the stake in the assets or in the sum of the business accounts (for cooperatives – Genossenschaften) is decisive (Sec. 8b para. 4 sent. 1 half sent. 2 CITA n.v.).
Only indirect shareholdings held via partnerships can be taken into consideration on an aggregate basis Participations held via a partnership are attributed to the respective partners in order to determine the 10%-threshold at partner’s level pursuant to Sec. 8b para. 4 sent. 4 CITA n.v. This applies accordingly if a participation is held indirectly via a multi-tier partnership structure. Such shareholdings being held via partnerships are regarded as being held directly by the relevant partner (sent. 5). In that context it appears noteworthy that participations held by mere asset administrating partnerships are already attributed to the members of the partnership pursuant to Sec. 39 para. 2 no. 2 of the General Tax Code (Abgabenordnung – ‘GTA’); thus, a separate provision for shareholdings that are indirectly held via such mere asset administrating partnerships is not necessary. Further, pursuant to the legal reasoning, participations directly held by the investors but attributed to the business of a partnership for tax purposes as so-called special business assets (Sonderbetriebsvermögen) shall only be attributed to the respective partner (and not pro rata to all partners of the partnership).
Contrary hereto, the shareholdings held by different entities in a fiscal unity (Organschaft) are not added up, but regarded separately for each entity (Sec. 15 sent. 3 CITA n.v.).
Participations are to be regarded on an aggregate basis within associated groups (e.g. a Saving Banks Association – Sparkassenverbund) if members of the same associated group are shareholders of other members of the group (Sec. 8b para. 4 sent. 8 CITA n.v.).
Special provisions for the attribution of participations in case of securities lending For purposes of the new rule, participations transferred by means of a securities lending or other transfers within the meaning of Sec. 8b para. 4 sent. 8 CITA are attributed to the lender and not to the borrower (Sec. 8b para. 4 sent. 3 CITA n.v.). This rule aims to prevent minority shareholders from exceeding the 10%-threshold by borrowing qualified shareholdings shortly around the effective date of the distribution of dividends.
Further, the application scope of Sec. 8b para. 10 CITA now also applies to cases where a minority shareholder transfers its minority participation within the meaning of Sec. 8b para. 4 CITA n.v. to a qualified shareholder, e.g. by means of a securities lending. In this case, the miTaxation of dividends from minority shareholdings and w/h tax refund | Issue 2/2013 4 nority shareholder is regarded as a so-called detrimental lender so that for tax purposes the lending fees are not deductible at borrower level.
Determining the shareholding interest in cases of reorganizations A special provision is set out for determining the relevant participation ratio in
the case of a reorganization:
At shareholder’s level, the transfer of an entity (transferring entity) to another entity (absorbing entity) e.g. by means of merger, spin-off or split-up results in a share-for-share exchange (i.e., receipt of shares in absorbing entity as consideration for shares in transferring entity). In this case, the shares in the absorbing entity substitute the shares in the transferring entity pursuant to Sec. 13 para. 2 sent. 2 CITA (so called “footsteps theory” – Fußstapfentheorie). However, pursuant to the new rule, the “footsteps theory” is not relevant for the question whether there is a qualified shareholding within the meaning of Sec. 8b para. 4 sent. 2 CITA (Sec. 8b para. 4 sent. 2 CITA n.v.).
This provision has an adverse effect if a participation of at least 10% is reduced to less than 10% due to the reorganization. This shows the following Example VI: A-GmbH is the sole (100%) shareholder of B-GmbH.
The B-GmbH is merged into X-GmbH. After the merger, A-GmbH is diluted to a 8% participation in X-GmbH. Legal-wise, the merger becomes effective upon its registration in the commercial register on 1 April. On 15 May, A-GmbH receives a dividend from X-GmbH.
Solution: With regard to a qualified shareholding within the meaning of Sec. 8b para. 4 CITA n.v., the acquired shares do not enter into the tax status of the 100% shareholding in B-GmbH. Thus, the dividend is fully taxable for corporate income tax because A-GmbH held no shares in X-GmbH purposes at the beginning of the calendar year.
In our view, the contrary situation (increase of a minority shareholding to a qualified shareholding in connection with a merger) does not mandatorily have an adverse effect. This shows the following Example VII: A-GmbH holds a 8% participation in B-GmbH. B-GmbH is de-merged, whereby different shareholder groups shall be split among the newly existing entities with effect of 8 April. As a consequence, A-GmbH receives a 50% participation in the (by way of demerger) newly established X-GmbH. On 15 May, X-GmbH distributes a dividend to its shareholders.
Solution: At the level of A-GmbH, the distributed dividend is tax-free.
In fact, it had no qualified shareholding at the beginning of the calendar year; however, as a consequence of the de-merger, it receives a 50% shareholding in X-GmbH. As for this shareholding the “footsteps theory” is not applicable (see above), the shareholding’s acquisition took effect during the year. Pursuant to Sec. 8b para. 4 sent. 6 CITA n.v., this acquisition is regarded as having taken effect at the beginning of the calendar year so that A-GmbH is regarded as qualified shareholder..
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1.4 Time scope of application The new provision applies to all dividends or other income within the meaning of Sec. 8b para. 1 CITA that are distributed after 28 February 2013 as well as security lending transactions pursuant to Sec. 8b para. 10 CITA entered into after this date (Sec. 34 para. 7a CITA n.v.).
1.5 MiscellaneousDeduction of business expenses
Since the dividends are taxable, also any expenses in connection herewith are tax-deductible; insofar the limitations for the deduction of expenses incurred in connection with tax-free income, Sec. 3c ITA does not apply. Consequently, the 5% lump-sum add-back for non-deductible expenses pursuant to Sec. 8b para. 5 CITA does also not apply (Sec. 8b para. 4 sent. 7 CITA n.v.).
This implicates that current expenses for a minority shareholding (i.p. financing expenses) remain deductible even if taxable dividends have not been distributed in the respective calendar year. In that context it should in our view not be detrimental that a shareholder might realise tax-free capital gains pursuant to Sec. 8b para. 2 CITA because in this case the business expenses remain deductible as well due to the provisions of Sec. 8b para. 2 and 3 CITA.
The new provision should in our view not affect the non-deductibility of capital losses and impairments set forth in Sec. 8b para. 3 sent. 3 CITA. This means that impairments on minority shareholdings remain non-deductible for tax purposes (comparable to capital losses).
Capital gains not taxable The provision of Sec. 8b para. 4 CITA n.v. does not cover capital gains from the disposal of minority shareholdings.