Germany: Withholding tax on dividends paid by German hybrid entities
New BZSt position appears inconsistent with previous guidance
The German Federal Central Tax Office (BZSt) has recently taken the position that dividend payments from a German subsidiary to its U.S. parent company are not eligible for a reduced withholding tax rate under the double tax treaty (DTT) between Germany and the United States (“Germany-US DTT”) if the German company is classified as a partnership (so-called “disregarded entity”) for U.S. tax purposes.
The decision is based on Article 1, Paragraph 7 of the Germany-US DTT, which stipulates that a reduced withholding tax rate is only available if the payment is treated as income at the level of the U.S. recipient. The BZSt's position is that this condition is not met for payments between a German entity treated as a disregarded entity and its U.S. parent.
KPMG observation
This development has been communicated orally by the BZSt and appears inconsistent with previous guidance issued on March 17, 2025, when the BZSt had relaxed its stance on the entitlement of indirect shareholders to treaty benefits. The interpretation of Article 1, Paragraph 7 of the Germany-US DTT is questionable as a basis for the new position.
Existing exemption certificates are not expected to be affected by this new position, but taxpayers may need to review these certificates, especially if the German entity's status as a disregarded entity was not disclosed during the application process.
Read a December 2025 report prepared by the KPMG member firm in Germany
For more information, read a December 2025 report prepared by KPMG Germany's Department for Professional Practice