Germany: No Treaty Relief for Dividends of DREs?

In brief

The Federal Central Tax Office (FCTO) appears to have adopted a new administrative practice:

It has been reported that withholding tax exemption certificates under Section 50c German Income Tax Act (EStG) are denied where the dividend distributing corporation in Germany is held by a US parent and is treated as a disregarded entity (DRE) for US tax purposes.

If these reports are accurate, this would represent a significant departure from longstanding practice. In many structures, the impact may be severe:

• Dividend withholding tax (26.375%) may become due on dividend distributions, including deemed dividend distributions following transfer pricing adjustments.
• Royalty payments from German DREs may also be affected, with the domestic rate being 15.825% and, accordingly.
• Restructuring needs could arise.

Crucially, this new administrative view has no apparent treaty law or statutory basis. Our analysis suggests that treaty benefits must still be granted in DRE constellations, as further explained below.

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