Pretty much any German inbound-investment has to consider how profits can be extracted in the most tax-efficient manner. In principle, dividend distributions carry a 25% German withholding tax (plus the solidarity surcharge of 5.5% thereon). German domestic law offers a reduction to 15% if the recipient is a foreign corporation and the EU Parent/Subsidiary Directive or an applicable treaty might provide for a lower or even a zero rate.

This is all, however, subject to the rather harsh German anti treaty/directive shopping regime (Sec. 50d para. 3 of the German Income Tax Act). The respective withholding tax reduction will not be granted if, among other things, the ultimate parent would not qualify for the reduced rate and the interposed recipient of the dividend was either not established for sound economic reasons or does not engage in general economic activities with sufficient substance. As investments are often made through, for example, a Luxembourg or Dutch HoldCo with limited substance, these rules are always a major issue.

While tackling abusive structures is obviously legitimate, the German substance requirements go beyond that and the ECJ has held in two recent and ground-breaking decisions (Deister/Juhler and GS) that the previous and existing German anti treaty/directive shopping regimes were/are in violation of both the freedom of establishment (Art. 49 TFEU) and the Parent/Subsidiary directive.

Does this also also apply to intermediaries in non-EU jurisdictions such as Switzerland or the US, which can only benefit from the free movement of capital? The answer should clearly be yes, as the German substance requirements kick in irrespective of whether the investor has a controlling stake, so that the freedom of establishment does not block the free movement of capital according to the ECJ's established formula.

Unsurprisingly, German tax authorities have so far taken a very narrow view on how Deister/Juhler should be applied in practice and it is yet to be seen how tax authorities and the German legislator will react on GS.

As a result, there is still much uncertainty when it comes to tax planning considerations on the repatriation of German-source profits. Alternative routes that may be considered include share buybacks or distributions out of the corporation's contribution account (if available and accessible at all). Receiving the dividend distributions through a German partnership might also be an option on the back of promising jurisprudence of the Bundesfinanzhof.

Very recently, the ECJ issued a combined decision in four cases (N Luxembourg 1, et al.) which contains explicit guidelines on what the ECJ considers as abusive, which criteria should be applied when testing an abuse, and who has the burden of proof. The German legislator now has to take this into account in considering the future of the German anti treaty/directive shopping regime which is currently in violation of EU law and, hence, inapplicable.