The German Government officially introduced a governmental draft for a reform of the German withholding tax (WHT) regime on 20 January 2021. The objective of the draft law is to simplify and digitalize the procedure to register the WHT, to issue tax certificates with respect to WHT and to obtain relief from WHT. However, in particular the changes to the anti-treaty shopping rule would lead to a lot of uncertainty as regards the entitlement for a treaty relief in corporate- and PE-structures.
Relief from German withholding tax
The overall procedure generally remains applicable – i.e., WHT on dividends and royalties would need to be withheld even if they were not to be taxed under the parent-subsidiary-directive or a double taxation treaty. Non-German taxpayers could obtain relief from German WHT either through a refund of the tax that has already been withheld or by being issued an exemption certificate (Freistellungsbescheinigung) before the payments are made. It should be noted that exemption certificates could only be issued for future payments (for a maximum period of three years). The (retroactive) issuance of an exemption certificate for previous years would no longer be possible. Additionally, the paying agent for WHT purposes would be obliged to file a WHT registration, even if there was a full relief under an exemption certificate and no WHT had to be remitted. All applications would need to be filed electronically with the Federal Tax Office (Bundeszentralamt für Steuern (BZSt)), and exemption certificates would also be granted only electronically.
Anti-treaty shopping rule
Another significant proposed change of law included in the governmental draft is the revision of the anti-treaty shopping rules. The draft law intends to reflect action 6 of the ATAD as well as jurisprudence from the Court of Justice of the European Union. The new rule would apply a two-step approach with a general presumption of treaty abuse under certain circumstances and the possibility of a rebuttal of the presumption by the taxpayer under specific conditions. This would result in a significant tightening of the anti-treaty shopping rule and would consequently limit the circumstances in which non-resident companies may qualify for WHT relief. The revised anti-treaty shopping rule would also apply in cases where a double tax treaty includes a specific anti-abuse rule. If the revised rule becomes law, it has to be expected that, in many cases in which full WHT relief is available today, relief could be denied under the new anti-treaty shopping rule.
German withholding tax registration and certificate
Under the new law, the paying agent would no longer issue a tax certificate for WHT to non-domestic dividend recipients, but will report the respective information directly to the BZSt. Additionally, the amount of information to be included in the tax certificate (i.e., the report) would increase significantly, and the potential liability of the issuer of a wrong or incorrect tax certificate would be significantly tightened. The issuer of an incorrect tax certificate could no longer exculpate itself from the liability by arguing that the taxpayer provided incorrect information or by informing the tax authorities of the fact that an incorrect tax certificate was issued. This change is the German legislator's reaction to previous cum/ex cases - see my earlier post the publication of the first criminal judgement on cum/ex transactions in Germany for further details on the cum/ex cases.
As regards the revision of the withholding tax relief procedure, the digitalisation and simplification of the procedure is very welcome although it remains to be seen whether it turns out to be the expected simplification in practice. While parts of the new rules would apply from 2022 onwards, the fully digitalized procedure would apply from 2024, so taxpayers and tax authorities should have time to prepare for the new procedure.
Unlike the former working draft law issued by the German Ministry of Finance on 20 November 2020, the current governmental draft does not limit the current (non-resident) taxation rules for royalty income and capital gains relating to rights on the basis that these rights are registered in a public German book or register - Sebastian Heinrichs previously discussed this issue in light of a letter from the German Ministry of Finance dated 6 November 2020 on the taxation of German-nexus IP.
It remains to be seen whether there are any additional changes to the draft in the course of the further legislative process.