Germany has a general anti-abuse rule (GAAR) as well as other purpose tests under various specific anti-abuse rules (SAARs) in different parts of the legislation. One example of a SAAR would be the principal purpose test in the anti-treaty or directive shopping rule which also happens to be an area under increasing scrutiny by the German tax authorities. Generally, where such specific anti-abuse rules apply, the GAAR may not be applied cumulatively, However, the specific SAAR often contains explicit wording that the GAAR nevertheless applies.

In this context, it will also be interesting to see how the European Commission UNSHELL/ ATAD III proposal (see this earlier post) affects the application of the GAAR and the anti-treaty/ directive shopping rule.

GAAR

The GAAR applies where the tax advantage obtained is achieved in an artificial or unusual manner not in line with the objective or purpose of the relevant legislative provision.

If the taxpayer cannot demonstrate good business reasons for the chosen transaction speaking against a breach of the GAAR, the tax effects of the abusive structure will be disregarded and replaced by the tax effects of a proper structure.

Anti-treaty/directive shopping rule

Under the German anti-treaty/ directive shopping rule a key question to obtain withholding tax relief for dividends/ royalties is the proof that obtaining a tax benefit is not a principal purpose. Whether obtaining a tax benefit is a principal purpose must be decided in light of all the circumstances of the individual case. The burden of proof is on the taxpayer.

In order to rebut the presumption of an abuse for the purposes of the anti-treaty/ directive shopping rule, the taxpayer must prove that obtaining a tax benefit was none of the principal purposes for establishing the holding entity in the respective jurisdiction. In this context, all tax reasons as well as non-tax reasons must be taken into account.

Enforcement trends

The application of the anti-treaty/ directive shopping rule is an increasing area of focus for the German tax authorities.

Other areas of focus beyond purpose tests include challenges to the foreign place of management, especially in connection with investment pooling vehicles, or to a foreign permanent establishment. There is also the ongoing investigation and challenge of withholding tax refunds and credits in connection with cum/ex and, to an increasing extent, also cum/cum transactions.