Points addressed during the hearing
Restriction of the free movement of capital
The question discussed before the court was whether foreign funds are comparable with German funds and whether the situation of funds’ investors should be taken into account in this assessment.
To determine the comparability, it was discussed whether the L-Fund (C-537/20) case concerning the discriminatory treatment of a Luxembourg real estate fund receiving German immovable property income was directly applicable in the case under review.
In its conclusion, the Court of Justice of the European Union (CJEU) ruled that discrimination existed, thereby finding that the German tax treatment of income generated by non-resident closed-end real estate funds from real estate located in Germany violates the free movement of capital. For further details on the L-case, please consult our previous Fund Tax Alert here.
Taking this case law into account, KPMG argued that comparability should take place at the level of the fund as the German legislation specifies that “German funds are exempt from tax” without any additional obligation foreseen under German law.
Therefore, KPMG explained that German legislation constitutes a restriction on the free movement of capital at the level of the foreign investment fund. There is no further need to take into account the tax situation of the funds’ investors.
Justification based on the coherence of the German tax system
As in the L-Fund case, the coherence of the tax system argument was discussed. KPMG put forward that the German tax exemption does not foresee that it is dependent on a subsequent distribution and taxation at investor level. As a consequence, that coherence should not apply.
Even if it would be applicable, it could not be considered as proportionate because foreign funds having German investors were already doing everything necessary to achieve the objective of the German legislation (transparency at investor level) via Sec. 5 German Investment Tax Act-reporting.
A new argument was raised by the German Tax Officer (“Officer”), whereby they invoked comparability to the Danish Supreme Court decision on the Fidelity Fund case from June 2021.
KPMG’s view is that we are not in the presence of comparable cases. It was highlighted to the Fiscal Federal Court that the reasoning of the Fidelity case is linked to the Danish IMB regime (i.e., the Danish fund’s withholding tax exemption was linked to the profit distribution towards Danish investors), while Germany does not have similar taxation like in Denmark’s case. Additionally, KPMG also reminded the Court that a complaint with the European Union Commission has been filed, since the Danish Supreme Court has incorrectly applied CJEU’s decision in the Fidelity case (C-480/16).
Late interest payment
Based on constant CJEU case law, WHT should be reimbursed with late interest payments although the German Tax Code does not provide interest payments to WHT-refunds in strictly German situations.
The question discussed during the hearing mainly covered the interest rate to be applied and the starting point of the late interest computation.
From the Officer’s point of view, the applicable interest rate should be the one of the European Central Bank. This argument is based on the fact that German tax law does not foresee any rate applicable to EU law claims. This would mean that a rate of approximately 0% would be applicable in many of the previous years.
However, KPMG argued that even though there is no law in place, the principle of EU law based interest-payment obligation for unduly paid taxes should be applicable. Moreover, another chamber of the Fiscal Federal Court had in another case already decided that 0.5% needs to be applied, which potentially would bound the judges to take a similar decision based on the principle of the silent approval of the other chamber.
Regarding the starting date of late interest payments, the Officer argued that it should start 4 months and 10 days after the application date/filing date. In KPMG’s view, the discrimination starts when the taxes have been withheld, therefore the interest should start on the date of the distribution is received (Ex-Date) and this principle is embedded in the Imre (ECJ of April 18, 2013 Case 565/11, HFR 2013, 659), Jülich (ECJ of September 27, 2012 Case 234/10, HFR 2012, 1210), Rafinaria Steaua Romana (ECJ of October 24, 2013 Case 431/(12, HFR 2013, 1163) and the Decision of the Federal Tax Court of September 22, 2015 (VII R 32/14 BStBl II 2016, 323).
Applicable time limitation period
The Officer indicated that in case of a positive decision, a maximum of 4 years claimed is to be paid back but it was not a topic discussed with the judges.
Nevertheless, the Fiscal Federal Court clarified that for EU claims the same procedure should be applicable as for intra-German claims. As such there should not be an application of the procedural double tax treaty rules (which foresees a 4 years time limitation that starts from 1st January after the dividend distribution). For that reason, the Festsetzungsverjährung (limitation period for assessment) and Ablaufhemmung (suspension of expiry) could be more than four years but in a worst case scenario, only 4 years are granted.
As this point in time, it is not certain whether the Fiscal Federal Court will rule on the time limitation period applicable for both test cases.
