Significant updates to domestic withholding tax rules in Germany

Draft law would tighten application of anti-treaty shopping rules substantially and modernize existing WHT procedural rules. The approach provided in the draft law would result in a significant tightening of the conditions to benefit from a reduced WHT rate under a tax treaty or an EU directive. Foreign investors should consider their structures and any payments made by a German company that may trigger WHT.

On 20 January 2021, the German government approved a draft law on the Modernization of withholding tax relief and certification of withholding tax (Abzugsteuerentlastungsmodernisierungsgesetz) that includes significant proposed changes to the anti-treaty shopping rules, as well as modernization of the domestic withholding tax (WHT) procedural rules. The changes to the anti-treaty shopping rules would tighten the application of the rules and restrict the circumstances under which nonresident companies may qualify for WHT relief. The draft law does not contain a proposed effective date for the changes to the anti-treaty shopping rules, so the changes would be expected to become effective in the year in which the law is enacted.

The draft law also includes changes to the transfer pricing rules and the introduction of broad advance pricing agreement procedures into domestic tax law. The proposed relaxation of the German extraterritorial tax rules relating to intellectual property rights that are registered in a German public book or register that had been included in the original draft law proposal is not finally included in the approved draft law.

Update of anti-treaty shopping rules

The update of the anti-treaty shopping rules is a reaction of the German government to several decisions of the Court of Justice of the European Union in which the court concluded that the current version of the anti-treaty shopping rules violates EU law. The update takes into account such jurisprudence, as well as the requirements of the general anti-abuse rule in article 6 of the EU anti-tax avoidance directive (ATAD).

Similar to the current rules, the proposed anti-treaty shopping rules would apply where WHT benefits are claimed under a tax treaty or an EU directive (parent-subsidiary directive or interest and royalties directive), as well as where unilateral relief from WHT is claimed under income tax code (ITC). However, the proposed rules would rely more on subjective elements than the current rules. A two-step approach would apply consisting of a basic rule under which there would be a general presumption of treaty abuse under certain circumstances, with the possibility of rebutting the presumption in a second stage by providing counter-evidence of relevant non-tax reasons for the interposition of the nonresident company with respect to the relevant income.

Withholding tax procedures

In addition to the amendments to the anti-treaty shopping rules, the draft law would introduce several measures to update and modernize the current procedural rules to claim a reduced WHT rate under a tax treaty or an EU directive. The general framework of the rules, under which a WHT exemption certificate is required in advance to claim a reduced WHT rate under a tax treaty or an EU directive, would not change. In a case where no such exemption certificate is available, the domestic WHT rate applies at the time of withholding and a reduced WHT rate under a tax treaty or an EU directive must be claimed in a refund procedure.

The updated WHT rules would introduce an electronic filing process and an electronic database for carrying out refund and exemption certificate procedures. Electronic submission of applications for WHT exemption certificates and WHT refund applications would be expected to be available as from 2023.

Further, the procedure of applications for a WHT exemption certificate and WHT refund applications would be simplified by the federal tax office accepting separate foreign tax residency certificates from other jurisdictions, instead of requiring the German application forms to be stamped by the foreign tax authorities.

The three-year validity period for WHT exemption certificates would remain unchanged under the proposed rules; but the validity would be determined from the date of its issuance, instead of from the original application date. This change also would have consequences for WHT that becomes due in the interim period between the date when the application is filed and the date of issuance of the exemption certificate.

In addition, the draft rules include detailed provisions regarding the issuance of tax payment certificates for WHT on dividends, and would introduce penalties for noncompliance with these rules.

This is an excerpt from the article published on web pages of Deloitte Germany, where you can find full version.

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