Court of Justice asked to consider German anti-treaty shopping rules

Werner Geisselmeier, an expert in German tax, at Pinsent Masons, the law firm behind Out-Law.com, said: "Any non-German resident taxpayers who have fallen foul of the anti-treaty shopping provisions or who have relief denied in the future as a result of these provisions should watch this case."

"If the court rules against the provisions, the German rules may have to be changed and taxpayers may be able to claim repayments of tax withheld," he said.

The anti-treaty shopping provisions provide that a non-German resident company that receives a payment subject to German withholding tax will only be entitled to withholding tax relief under a double tax treaty or under the EU parent-subsidiary directive in certain situations. The relief will only be available if the shareholder test and the business income test are satisfied. The shareholder test is that the company is owned by shareholders who would be entitled to relief under an applicable tax treaty or an EU directive, had they received the income directly. The business income test is that the gross receipts generated by the non-resident company in the relevant year derive from the company’s genuine own business activities.

The disallowance of withholding tax relief does not apply if the non-resident company can show that there are economic or other relevant non-tax reasons for the interposition of the non-resident company with respect to the relevant income; and that the non-resident company has adequate business substance to engage in its trade or business and it participates in general commerce.

In the case considered by the Cologne court, a Netherlands holding company held shares in a German company, which paid dividends. The shares in the Netherlands company were held by another German company. The Federal tax office denied the Netherlands company a refund of the tax withheld on the dividends on the basis that neither the shareholder test or the business income test was satisfied and the Netherlands company did not have sufficient business substance.

The Tax Court of Cologne referred the matter to the CJEU for an opinion on whether the German rules restrict the European fundamental freedom of establishment. In contrast to the position of a non-resident under the anti-treaty shopping rules, a German resident company receiving dividends from other German companies would be entitled to an exemption from the withholding tax, without having to satisfy detailed conditions.  

In some circumstances restrictions are permitted if they are to prevent tax avoidance. However, in the 2006 Cadbury Schweppes case, the CJEU said that restrictions are only permitted if they do not go beyond what is necessary. The Cologne Court has asked the CJEU to decide whether the German rules would pass this 'proportionality' test.

This is the third case in which the Tax Court of Cologne has requested a preliminary ruling from the EU's highest court with regard to the anti-treaty shopping rules. In 2016, the court referred cases involving the rules which were applicable from 2007 to 2011.