Germany: Application of anti-treaty/directive shopping rule to interest on convertible bond (tax court decision)

Cyprus-domiciled taxpayer entitled to refund of German withholding tax

Cyprus-domiciled taxpayer entitled to refund of German withholding tax

The German Federal Tax Court (BFH) held that a Cyprus-domiciled taxpayer is entitled to a refund of German withholding tax imposed on interest it received on a convertible bond only if such taxpayer satisfies the substance requirements of either the new or the old version of the German Anti-Treaty/Directive Shopping Rule (Section 50d (3) of the German Income Tax Act (EStG)).

Background

Certain payments from Germany to other countries are in general subject to withholding tax, irrespective of any existing income tax treaty. The payment recipient in another country can submit an application to have the German withholding tax refunded. However, in order to do so, the recipient must fulfill certain substance requirements in accordance with the German Anti-Treaty/Directive Shopping Rule.

The Court of Justice of the European Union (CJEU) held in 2017 and 2018 in the context of dividend payments that the old version of the German Anti-Treaty/Directive Shopping Rule violated European law due to its strict substantive requirements (C-504/16 and C-613/16 as well as C-440/17). The rule was therefore revised effective 9 June 2021 and is in principle applicable to all open cases. However, to the extent application of the new rule would leave the taxpayer in a worse position, the old version of the rule may continue to apply. 

Summary

The Cyprus-domiciled taxpayer in this case did not have any substance. However, an associated company of the taxpayer, which was also domiciled in Cyprus, had offices and staff of its own. Moreover, the offices were equipped with the necessary work facilities and communication equipment.

The lower court (Lower Tax Court of Cologne) came to the conclusion without extensive analysis that the taxpayer’s refund claim was admissible because the old version of the German Anti-Treaty/Directive Shopping Rule violated European law.

The BFH first raised doubts as to whether the CJEU judgment in the context of dividends regarding the violation of European law of the old version of the German Anti-Treaty/Directive Shopping Rule applied to a case involving interest on a convertible bond (rather than dividends).

The BFH further concluded that a general reference to the economic activity of another group company in the country of domicile of the payment recipient was not sufficient to find that the taxpayer satisfied the substance requirements of either the new or old version of the German Anti-Treaty/Directive Shopping Rule. The BFH therefore referred the case back to the lower court to perform a comprehensive examination of the organizational and economic characteristics of the taxpayer to determine whether the substance requirements of either the old or new version of the German Anti-Treaty/Directive Shopping Rule could actually be satisfied.

Read a July 2022 report [PDF 336 KB] prepared by the KPMG member firm in Germany 

 

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