GERMANY: ECJ questions Tax-Treaty Shopping Rules

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The European Court of Justice (ECJ) is now being asked to look into a Dutch business’ suit regarding the rules in Germany for anti-tax treaty shopping which are allegedly conflicting with EU law.

The provisions under examination affirm that Germany has the ability to charge withholding tax on payments to businesses overseas except for specific conditions, i.e. if the business income test and the shareholder test are fulfilled. However, these certain requirements are not administered equally to German-resident companies.

The business income test relates to the gross receipts produced by the non-resident firm in the applicable year, acquired from the company’s own business activities.

The shareholder test refers to the company being owned by shareholders, who would be allowed relief under an EU directive or a suitable tax treaty, if the respective shareholders received the income directly.

The Federal Tax Office denied the Dutch company a refund of the tax that was withheld on the dividends due to the fact that the Netherlands firm did not have adequate business substance and neither the business income test and the shareholder test were satisfied.