Fund Taxation Alert 2023-04

Germany: Positive decision by the CJEU on the L-Case

Germany: Positive decision by the CJEU on the L-Case


On April 27, 2023, the Court of Justice of the European Union (“CJEU”) gave its decision in the case C-537/20 (L-Fund), that concerns the EU law compatibility of the German corporate income tax applicable to non-resident closed-end real estate funds.

The plaintiff was a Luxembourg closed-end fund that received income from renting and selling real estate properties in Germany. L-fund challenged the fact that under German tax law for domestic closed-end real estate funds with exclusively non-resident investors, the immovable property income is attributed directly to the latter, and the relevant tax is withheld by the fund. On the other hand, non-resident closed-end real estate funds do not benefit from the corporate tax exemption in respect to the immovable property income derived. Instead, such revenue is taxable at fund level.

In the case at hand, the CJEU indicated that, in their view, the only criterion of distinction in the German law was the tax residence of the fund and therefore resident and foreign closed-end real estate funds were in a comparable situation.

CJEU successively considered and rejected the justifications brought forward by the German government, i.e. the need to safeguard the coherence of the German tax system and the need to ensure a balanced allocation of taxing rights. Finally, CJEU also noted that justifying a tax advantage based on the coherence of the tax system required a direct link between such advantage and offsetting it with a tax levy. However, even if such direct link existed, which needed to be decided on national level, in their view, the rules under dispute were not proportionate.

To sum up the above, CJEU held that the German tax treatment of revenues derived by non-resident closed-end real estate funds from immovable property located in Germany, with exclusively foreign investors, was contrary to the free movement of capital. For further information regarding the L-Case please refer to the Euro Tax Flash published by KPMG’s EU Tax Center. 

KPMG Comment

This decision provides a positive development on the German market for the reimbursement of withholding taxes by foreign investment funds based on EU Law. This especially applies to KPMG’s German test cases involving a French and a Luxembourgish UCITS fund which are currently pending before the German Fiscal Federal Court. These test cases aim at clarifying the question as to whether the German legislation applicable to foreign investment funds before 1st January 2018 (old version of the German Investment Tax Act) is in breach of EU law.

Referring to constant CJEU case law, (e.g., C-545/19 compatibility with EU law of the Portuguese withholding tax levied on dividends paid by Portuguese companies to foreign UCITS), the L-Case decision confirms that, if the taxation of the investment fund solely depends on country of residence of the fund, then a non-resident investment fund is in a comparable situation than a resident investment fund.  This principle should also apply to the taxation of widely held funds under the old version of the German Investment Tax Act.

In addition, once again CJEU concluded that taxation of foreign investment funds constitutes an unjustified breach of EU law. This principle should a fortiori be transposed to the test cases, as under the old version of the German Investment Tax Act, German funds were exempt from German dividend withholding tax regardless of a subsequent taxation of the German investors.

It may be noted that CJEU has decided this case without Advocat General’s opinion and did not recognize that the case at hand raised any new legal questions (i.e., not already answered by former CJEU case) law.  This should give an additional incentive for domestic courts to decide cases involving the discrimination of foreign investment funds without asking a preliminary question to CJEU.

Based on the above, the chances for a positive outcome on the two test cases which are currently pending in front of the German Federal Fiscal Court, have also increased. We expect these cases to be decided in 2023.

Do not hesitate to reach out to our team of tax specialists if you would like to reclaim withholding taxes in Germany.