Mitigation of the German anti-treaty shopping rule by the Federal Central Tax Office

Background

Insofar as the requirements of the so-called anti-treaty shopping rule of Sec. 50d (3) EStG are met, the entitlement of a corporation, association of persons or estate with limited tax liability (hereinafter referred to as the company or applicant) to relief from German withholding tax (WHT) resulting from a double taxation agreement (DTA) or an EU directive (Parent-Subsidiary Directive, Interest License Directive) is wholly or partially denied. Specifically, Sec. 50d (3) EStG stipulates that a company is not eligible for WHT relief to the extent that

1. its shareholders would not be entitled to this WHT relief if they would receive the relevant payment directly (personal entitlement or “Look-Through Approach”)
2. the relevant source of income has no substantial economic connection to an economic activity of the company (factual entitlement).

If the aforementioned conditions are cumulatively met, an abusive arrangement is generally assumed, and the claim for WHT relief is denied to that extent. However, this presumption of abuse can be refuted if the company proves that none of the main purposes of its involvement is to obtain a tax advantage (so-called “Principal Purpose Test”). Furthermore, there is no abusive arrangement if the company is listed on the stock exchange (so-called “Stock Exchange Clause”).

The regulation has been amended several times due to incompatibility with EU law, most recently in 2021. There have always been practical uncertainties in its application, which have led to significant delays in processing applications for the refund and exemption of German WHT. Although the processing time for relief applications at the BZSt has improved, processing can still take up to 24 months in some cases.

New information sheet on the practical application of the anti-treaty shopping rule

On 17 March 2025, the BZSt published a new information sheet on the entitlement to relief under Sec. 50d (3) EStG and commented on the practical application of the above-mentioned requirements. The information sheet refers only to the exemption and refund of German WHT on dividends under Sec. 50d (3) EStG, but not to the exemption or refund of WHT under Sec. 50a EStG, which is particularly levied on license payments.

Compared to its previous practice, the BZSt relaxes its view on personal entitlement and the Stock Exchange Clause in the information sheet.

Personal entitlement/Look-Through Approach:

• Previously, the BZSt had required that the hypothetical claim for WHT relief of the shareholders must be based on the "same" legal basis (e.g., the same DTA) as the relief claim of the applying company itself. An identical claim in terms of amount, which arises from a different legal basis (e.g., a different DTA), should not be sufficient.

• The BZSt is now moving away from this strict interpretation. According to the new information sheet, the company's claim for WHT relief should be granted even if its shareholders had a hypothetical WHT relief claim based on a different legal basis. If the shareholders would only have a lower hypothetical claim for WHT relief based on the same or a different legal basis, the claim of the company is reduced accordingly. Consequently, the relief claim can now also arise from a different legal basis (even if this provides for a lower relief claim).

• Example: US Corp. holds 100% of the shares in an EU holding company, which in turn holds 100% of the shares in a German GmbH. The GmbH distributes a dividend to the EU holding company.
• Previous view of the BZSt: No personal entitlement to relief, as the hypothetical reduction of WHT to 0% or 5% in the case of direct participation of the US Corp. in the GmbH would result from the DTA between the US and Germany, but the EU holding company's entitlement to relief results from the Parent-Subsidiary Directive (PSD) and is therefore not based on the same legal basis. If none of the other "escape rules" apply (no factual entitlement, Principal Purpose Test, or Stock Exchange Clause), the WHT relief was previously denied (i.e., WHT burden, including solidarity surcharge, amounting to 26.375%).
• New view of the BZSt: Personal entitlement is given. If the DTA between the US and Germany provides for a reduction of WHT to 0%, full WHT relief is granted for dividend distributions from German GmbH to EU holding company, which corresponds to the full WHT relief of the PSD. If, however, the DTA between the US and Germany only provides WHT relief to 5%, then WHT relief for dividends from German GmbH to EU holding company is only granted to 5%.

Stock Exchange Clause for multi-level shareholdings:

• According to the previous view of the BZSt, the Stock Exchange Clause could also be applied if a direct or indirect 100% shareholder of the applicant company is publicly traded, i.e. its main class of shares is traded significantly and regularly on a recognized stock. In this case, however, it was also necessary that the shareholder had a hypothetical claim for WHT relief under the same legal basis.

• In line with the above considerations regarding personal entitlement, the Stock Exchange Clause should now also apply even if the shareholder’s hypothetical WHT relief is based on a different legal basis. However, a prerequisite for the application of the Stock Exchange Clause in the case of indirect shareholdings is that the publicly traded entity and every entity in the shareholder chain has an identical or higher quantitative WHT relief claim compared to the applicant.

The information sheet does not provide any simplification with regard to the factual entitlement to relief. The BZSt continues to require a “participation in general economic transactions that goes beyond the scope of managing one's own or third-party assets”. The BZSt therefore continues to reject the recognition of an asset management activity as an economic activity.

There are also no new insights from the information sheet with regard to the Principal Purpose Test. To refute the presumption of an abusive arrangement, all tax and non-tax reasons must still be considered by the applicant. According to the BZSt, tax advantages can also arise from the tax law of the shareholder's country of residence of the applicant. Whether obtaining a tax advantage is to be regarded as the main purpose must therefore continue to be decided by assessing all the circumstances of the individual case.

Conclusion

The simplifications in the interpretation of the relief for German WHT by the BZSt are to be welcomed and are also required under EU law. Even if the information sheet is not legally binding, it provides important information on the interpretation of Section 50d (3) EStG by the BZSt and should be applied to current and future applications for German WHT exemption certificates as well as applications for WHT refund. Existing structures where WHT relief has so far been denied due to a lack of personal entitlement to relief and/or the applicability of the Stock Exchange Clause should be reviewed in light of the BZSt's new view.

It is to be hoped that the simplifications will also have a positive effect on the processing time for applications for refund and exemption from German WHT in the near future.

Further, it also remains to be seen whether the information sheet on the refund or exemption of German WHT on royalty payments in accordance with Sec. 50a EStG will also be updated. Until then, taxpayers should refer to the updated information sheet on German WHT on dividends in license cases.