Fund Taxation Alert 2021-10

The Withholding Tax (WHT) Relief Modernization Act which came into force on the 8th of June 2021 aims, inter alia, to simplify and accelerate the cumbersome and sometimes long procedure to benefit from relief at source or a refund of German WHT. 

Before the entry into force of the WHT Relief Modernization Act, there were several ways to benefit from a reduced tax burden on German income received.

1. relief at source
2. simplified application through the custodian bank 
3. filing a WHT reclaim application with the German tax authority 

Until now, the identification of the competent German tax authority which had the responsibility to administer the filed WHT reclaims based on EU law had not been officially clear. Due to this ambiguity, each claim had to be submitted to several German tax authorities simultaneously. Filings were to be sent to Bundeszentralamt für Steuern in addition to the tax offices in whose location the distributing corporations have their registered office, the tax office in which the main part of the WHT had been withheld and to the tax office Wiesbaden I, which is responsible for the Central Securities Depository. The German WHT Modernization Act brings new clarity to the situation which will imply future changes to the WHT process for entities who are subject to limited tax liability in Germany, such as foreign investment funds.

The WHT Relief Modernization Act delegates the competency to address WHT reclaims filed by limited tax liable entities to the German Central Tax Office (Bundeszentralamt für Steuern – BZSt). In addition to this, it will be a new requirement that the relevant tax status of a taxpayer must be reflected within the status certificates, forming part of the overall WHT reclaim package.

Following the amendments to the WHT Relief Modernization Act, the jurisdiction for refund applications is directly linked to the fund status of the applicant. Accordingly, it is important to identify whether an applicant is subject to "limited" or "unlimited" taxation in Germany (Section 7 (4) sentence 3 InvStG).

A foreign investment fund, which does not have a permanent establishment in Germany, is considered to be a limited taxpayer. From a German tax perspective, the Luxembourg transparent FCP as well as the Luxembourg SICAV carry the status of a limited taxpayer in Germany and hence are impacted by the recent developments in relation to the WHT Relief Modernization Act.

For foreign investment funds, a reclaim for a WHT refund via the operating tax office of the custodian bank is no longer an option. Such funds will be obliged to submit a status certificate to the custodian bank, prior to the payment of the dividend, in order to benefit from a relief at source of 15%. In case a status certificate cannot be obtained prior to the dividend payment, a WHT reclaim application concerning the remaining 11.375% (from 26.375% to 15%) can now exclusively be filed with the BZSt. A simplified WHT reclaim application through the custodian is therefore no longer an option.

In the light of these developments, we recommend obtaining a status certificate which should be submitted to the custodian. This will allow the fund to benefit from relief at source for a period of 3 years. Note that an application for a reduction at source according to German domestic law via the competent custodian bank can only be granted if the status certificates include the new requirement and are submitted prior to the relevant income being received by the fund.

Where the status certificate had not been requested and submitted in time to the custodian bank based on the new requirements, the foreign investment funds can file a claim directly to the BZSt in order to benefit from the reduced WHT rate of 15%.

It is possible for Luxembourg SICAVs and for FCPs to file WHT reclaim applications based on the double tax treaty signed between Luxembourg and Germany, if the investors in the concerned are demonstrably entitled to receive treaty benefits. A time limitation period of four years will apply to such WHT reclaim applications. In the case of WHT reclaim applications based on German domestic law, these must be submitted within a time limitation period of two calendar years after the end of the fund’s fiscal year in which the payment was received.

In light of these changes and the potential impact for your funds, we would recommend conducting an internal review of your current setup of the WHT exemption model and reclaim methods in Germany to ensure the recent changes have been applied.

We look forward to supporting you with the new reclaim process based on the developments summarized above. Please do not hesitate to contact us if you have any questions.

Partner
+352 22 51 51 5504
olivier.schneider@kpmg.lu

Manager
+352 22 51 51 7516
nicole.hoesen@kpmg.lu