Executive summary

The German Federal Central Tax Office (BZSt) has started issuing interest compensation assessments for historic withholding tax refunds following the landmark BFH Judgment of 13 March 2024 (I R 1/20), obtained in a KPMG-led test case.

The first assessments reviewed indicate that the methodology applied by the BZSt, including the commencement of the interest period and the interest rates used, may materially affect the amount of compensation awarded. The tax authorities currently apply different approaches depending on the relevant dividend year and apply annual interest rates of 6.0% until 31 December 2018, 1.8% from 1 January 2019 to 31 December 2026 and 3.6% from 1 January 2027.

Given the potentially significant amounts involved and the generally applicable one-month appeal deadline, investment funds should consider reviewing newly received assessments promptly to safeguard investors' rights and preserve access to available legal remedies.

Background

For more than a decade, non-resident investment funds have pursued German withholding tax refund claims based on the free movement of capital under EU law.

In its landmark judgment of 13 March 2024, the BFH confirmed that compensation for the loss of use of funds may be payable in addition to the underlying withholding tax refund. The case was initiated and led by KPMG and has now resulted in the first wave of interest compensation assessments being issued by the BZSt.

For many investment funds, these assessments represent the final stage of a recovery process that has remained ongoing for many years.

How are the first interest assessments being calculated?

Based on the first assessments reviewed, the BZSt currently appears to apply different methodologies depending on the relevant dividend year.

Interest commencement date
Interest rates

Dividend years up to and including 2011:

the interest period generally starts six months after receipt of the refund application.
Dividend years from 2012 onwards:

the interest period generally starts from the date on which withholding tax was deducted (i.e. calculated on a day-by-day basis).

This distinction can have a significant impact on the overall amount of compensation awarded and should therefore be reviewed carefully when assessing newly issued interest assessments.

The assessments reviewed indicate that the BZSt currently applies:

6.0% per annum (0.5% per month) until 31 December 2018
1.8% per annum (0.15% per month) from 1 January 2019 to 31 December 2026
3.6% per annum (0.3% per month) from 1 January 2027

Importantly, while the BFH acknowledged that domestic German interest provisions are relevant, the court expressly left open whether the reduced post-2018 interest rate applies in the context of these EU-law-based interest claims.

KPMG observations

The issuance of the first interest assessments marks an important new phase in the German withholding tax recovery landscape for non-resident investment funds.

While the landmark German Federal Fiscal Court (BFH) judgment established the principle that investment funds may be entitled to compensation for the loss of use of funds resulting from withholding taxes levied in breach of EU law, the first assessments reviewed indicate that important questions remain regarding the practical implementation of that entitlement.

In particular, the methodology currently applied to determine the commencement of the interest period for pre‑2012 dividend years, as well as the application of the reduced interest rates from 2019 onwards, may have a material impact on the level of compensation ultimately received by non-resident investment funds. The BFH expressly left certain aspects of the post‑2018 interest calculation unresolved and certain elements of the methodology currently applied by the BZSt may be open to challenge in light of the compensation principles developed by the European Court of Justice (ECJ).

Given the potentially significant amounts involved and the generally applicable one-month appeal deadline, investment funds should carefully assess newly issued interest assessments. Key aspects of the methodology may warrant further review and, where appropriate, investment funds may wish to consider whether appeals are necessary to safeguard investors' rights, preserve access to legal remedies and protect potential entitlement to additional interest compensation.

KPMG is currently assisting clients with the review of newly issued interest assessments, the assessment of potential appeal opportunities and the monitoring of appeal deadlines in order to help ensure that investors' rights are protected.

How can KPMG help?

Having initiated and led the test case that resulted in the landmark BFH decision, KPMG is uniquely positioned to support non-resident investment funds during this next phase of German withholding tax recovery proceedings.

KPMG is currently establishing a dedicated service offering covering:

review of BZSt interest assessments and interest calculations;
identification of potential appeal opportunities;
preparation and filing of appeals; and
PoA-based receipt of assessments and centralized appeal deadline monitoring.

Where a valid Power of Attorney is in place, KPMG can receive interest assessments directly from the German tax authorities and operate a centralized deadline-monitoring process to help ensure that investors' rights are protected and available legal remedies are preserved.

Frequently Asked Questions

Non-resident investment funds that have obtained German withholding tax refunds and are now receiving separate interest compensation assessments from the BZSt.

Following the BFH judgment of 13 March 2024, the BZSt has started issuing separate interest compensation assessments relating to historic withholding tax refunds.

The first assessments reviewed currently apply:

6.0% per annum (0.5% per month) until 31 December 2018
1.8% per annum (0.15% per month) from 1 January 2019 to 31 December 2026
3.6% per annum (0.3% per month) from 1 January 2027 onwards, where applicable

Certain aspects of the post-2018 interest methodology may warrant further review in light of the compensation principles developed by the European Court of Justice (ECJ).

No. For dividend years up to and including 2011, the BZSt generally applies a commencement date six months after receipt of the refund application. There may be arguments that this approach does not fully reflect the compensation principles developed by the European Court of Justice (ECJ), and the appropriateness of the methodology may therefore warrant further review.

For dividend years from 2012 onwards, the interest period generally starts at the time of withholding.

The methodology applied by the BZSt can materially affect the amount of compensation awarded. In addition, appeal rights are generally subject to a one-month statutory deadline.

Conclusion

The first BZSt interest assessments represent an important development for non-resident investment funds with historic German withholding tax refund claims. As the calculation methodology may materially affect the compensation awarded, funds should review newly issued assessments promptly and consider whether action is required within the generally applicable one-month appeal period.