Germany: Dividends paid during liquidation period may benefit from parent-subsidiary directive (Federal Tax court decision)
As long as distributed profits were generated before commencement of liquidation
The Federal Fiscal Court (BFH) held (VIII R 8/24, dated March 3, 2026, and published May 15, 2026) that dividend distributions made during a liquidation period can qualify for the nil withholding tax rate under the German implementation of the EU parent-subsidiary directive (PSD), as long as the distributed profits were generated before the commencement of the liquidation.
Summary
Under the German rules implementing the PSD, dividends paid by a German subsidiary to a qualifying EU parent company are generally exempt from withholding tax. However, the exemption does not apply with respect to dividends that are accrued when a subsidiary is liquidated or reorganized.
The case concerned a Luxembourg parent company that held 100% of a German GmbH that was dissolved as of December 31, 2010, and subsequently entered into liquidation. During the liquidation period, the GmbH made profit distributions to its Luxembourg parent company. The distributed amounts were derived from profits generated prior to the commencement of liquidation. The German tax authorities treated the distributions as being accrued in connection with the liquidation and therefore denied the full withholding tax exemption. Instead, the authorities granted relief in the form of a 10% withholding tax rate based on the applicable income tax treaty between Germany and Luxembourg.
The BFH rejected the tax authorities’ position and confirmed that the distributions qualified for full exemption from withholding tax. The court held that the limitation on distributions in the context of liquidation must be interpreted narrowly and not be applied to distributions funded out of operating profits that were generated before the liquidation period, even if the dividend was resolved and paid during the liquidation period. According to the court, the decisive criterion is the origin of the distributed profits, not the timing of the distribution. The PSD exemption therefore remains available for pre-liquidation earnings distributed after the start of liquidation.
Read a June 2026 report prepared by KPMG’s EU Tax Centre