GERMANY Law and Practice Contributed by: Michael Best, Gerald Herrmann and Jannis Lührs, POELLATH
which they may obtain a 100% tax exemption for divi - dends, provided that the parent company has held a direct stake of at least 10% in the subsidiary for a continuous period of 12 months or more. Certain activity requirements need to be met. Withholding tax might also be reduced, according to DTTs. The European Court of Justice (ECJ) ruled on 26 February 2019 in the context of the so-called Dan - ish Cases that no withholding tax exemption applies in the case of abusive structures, even if the criteria are met. Whether a structure is classified as abusive depends on certain criteria (eg, conduit only). Under the recently renewed German anti-treaty shop - ping rule, a foreign recipient of German dividends will only be entitled to obtain a relief from German WHT to the extent that one of the following conditions is met: • its shareholders would have been entitled to the same relief if they had received the payment directly; • the source of the income has a significant connec - tion to an own business activity carried on by the foreign recipient that explicitly does not apply in the case of a conduit situation (Danish Cases); or • the foreign recipient is a publicly traded company listed on a recognised stock exchange. If none of these conditions is met, the foreign recipi - ent may prove that none of the main purposes of its involvement is to obtain a tax advantage. Only specific interest income is subject to withhold - ing tax; this includes profit-related interest and excep - tions such as interest resulting from “over-the-counter transactions” and interest attributed to other types of income. In certain other cases (eg, interest collateralised by real estate in Germany), there is no German withhold - ing tax, however, the foreign recipient of the interest income has to file a German tax return (limited tax liability). Interest paid from an EU corporation to another EU corporation may be tax exempt if the Interest and Royalties Directive is applicable. Royalty payments
are subject to limited tax liability and withholding tax at an amount of 15.825%, which is levied on the gross income. 4.2 Key Treaty Jurisdictions for Inbound Investment Due to the favourable taxation measures granted to EU corporations, most foreign investors invest via EU member states. The most common tax treaty coun - tries are the Netherlands and Luxembourg. 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices German tax law has several anti-treaty shopping clauses to prevent the abuse of DTTs. German tax authorities therefore check whether an entity claiming tax relief with reference to a tax treaty generates its income through its own activities and whether there are considerable reasons to act via the tax-privileged entity in question. Furthermore, there are subject-to-tax clauses that prevent certain income from being taxed in either of two treaty countries. 4.4 Transfer Pricing Issues for Inbound Investors The main issue in tax audits regarding transfer pricing is ensuring compliance with the arm’s length princi - ple. Other issues are the examination of the transfer pricing methodologies chosen, the assessment of the attribution of beneficial ownership in the companies’ assets as declared, and ensuring the fulfilment of for - mal requirements when issuing the obligatory reports. 4.5 Challenges to Related-Party Limited Risk Distribution Arrangements All transactions within a group of companies must meet the requirements of the arm’s length principle. 4.6 Local Transfer Pricing Rules and OECD Standards Germany makes explicit reference to the OECD stand - ards in the circulars issued by the Federal Ministry of Justice and case law; furthermore, legal provisions such as Section 1 of the Foreign Tax Act are based on the OECD standards.
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