Germany: Compatibility of withholding tax rules with EU free movement of capital (CJEU referral)
Clarification on whether the free movement of capital applies to third-country entities
The German Federal Financial Court (Bundesfinanzhof) referred a case to the Court of Justice of the European Union (CJEU) concerning the compatibility of German withholding tax rules with the EU’s free movement of capital and freedom of establishment principles.
The case involves a Japanese parent company that owned a German subsidiary between 2009 and 2011. During this period, the German subsidiary paid dividends to its Japanese parent, which were subject to a 15% withholding tax under the German Corporate Income Tax Act (GCITA) and the Germany-Japan tax treaty. While EU/EEA parent companies may qualify for exemptions or refunds under the GCITA, such benefits are restricted for third-country parent companies, including those in Japan.
The Japanese parent company argued that this treatment placed it at a disadvantage compared to German parent companies, which generally receive tax-free dividends. The taxpayer sought a refund based on the EU’s free movement of capital principle. However, the German Federal Tax Office and Düsseldorf Fiscal Court rejected the claim, asserting that the freedom of establishment, which the plaintiff could not invoke as a non-EU entity, superseded the free movement of capital.
The Bundesfinanzhof identified unresolved legal questions and referred the matter to the CJEU. The court seeks clarification on whether the free movement of capital applies to third-country entities like the Japanese parent company, whether the withholding tax constitutes a restriction under EU law, and if so, whether such a restriction is justified. Additionally, the court asked whether Germany can impose further evidence requirements for refunds in these cases.
Read an August 2025 report prepared by KPMG’s EU Tax Centre