In a groundbreaking development, Germany’s Federal Fiscal Court (BFH) recently issued landmark rulings (case numbers I R 1/20 and I R 2/20) affirming the right of foreign investment funds to reclaim dividend withholding taxes previously withheld by Germany, citing discrimination under EU law.
Background
Between 2004 and 2017, Germany imposed dividend withholding tax (WHT) of at least 15% on dividends paid to foreign investment funds. In contrast, domestic German funds enjoyed complete tax exemption under Section 11 of the German Investment Tax Act (InvStG), creating discriminatory tax treatment in violation of the EU’s principle of free movement of capital (Article 63 TFEU).
The recent judgments specifically addressed claims by French (FCP) and Luxembourgish (SICAV) funds, represented notably by KPMG, which successfully argued for refunds of withheld dividends, setting a powerful precedent for similar claims.
Key Court Findings
The BFH ruled decisively, confirming that:
- Discriminatory Treatment: The differential tax treatment of foreign versus domestic investment funds violated EU law, specifically Article 63 TFEU, mandating refunds to affected foreign funds.
- Limitation Period: Refund claims must respect a four-year limitation period, beginning after the end of the year dividends were received or taxes withheld.
- Interest Payments: Refunds must include late interest at 0.5% per month. For claims before 2012, interest accrues from six months after filing the refund application. For claims from 2012 onwards, interest accrues from the actual dividend withholding date.
- Documentation and Procedural Steps: Refund applicants must clearly establish comparability to German funds, beneficial ownership, and proof of dividend withholding through detailed documentation, such as dividend vouchers and tax certificates.
Practical Implications for Investment Funds
This ruling has significant financial implications, with Germany’s Ministry of Finance estimating total refunds could reach EUR 7.5 billion. Investment funds from both EU and non-EU countries impacted between 2004 and 2017 now have the opportunity—and incentive—to proactively pursue their claims.
Funds already possessing documentation from prior Double Tax Treaty-based claims have an advantage, as original tax vouchers submitted in earlier applications can expedite this refund process.
Recommended Actions
Investment funds and asset managers should immediately:
- Review Claim Timeliness: Ensure all claims have been submitted within the statutory four-year limit.
- Organise Documentation: Compile necessary documentation such as dividend vouchers, proof of beneficial ownership, certificates of residence, and previous refund decisions.
- Monitor Correspondence: Closely track all communication from German tax authorities, as strict one-month response deadlines typically apply.
- Request Interest Payments: Explicitly include interest payments in refund claims to secure maximum recovery.
Next Steps
The cases have been returned to lower tax courts for final validation of refund amounts and interest calculations, expected to conclude within 6-12 months. German authorities will likely intensify information requests soon, emphasising the necessity for preparedness.
Given these developments, investment funds affected by this discriminatory taxation should move swiftly to protect their interests and maximise their potential recoveries.
Contact us for tailored guidance and assistance. We will help you to smoothly navigate this complex process.