On December 10, 2019, the German Ministry of Finance published a first draft of a reform of its controlled foreign corporation (CFC) taxation. Even though Germany had already implemented CFC taxation in 1972, a reform was necessary because the existing legislation is not in line with the requirements of the Anti-Tax-Avoidance Directive (ATAD) of the European Union in every aspect. At first glance, the proposed amendments look rather minor, but after a closer look it becomes evident that the reform has the potential to significantly increase compliance requirements, in particular for German investors in investment funds.

The European Court of Justice ruled (ECJ 13 November 2019 – C-641/17) that the definitive withholding tax levied on German dividends received by foreign pension funds infringes the principle of the free movement of capital (Article 63 of the Treaty on the Functioning of the European Union), provided that the foreign pension fund is in an objectively comparable situation as a domestic pension fund (Pensionsfonds). This is the case if a foreign pension fund allocates the received dividends either pursuant to the law in force in the state of residence or on a voluntary basis to its reserves for pension payment obligations. In this beinformed we explain the background as well as the practical implications of the ruling and who may benefit therefrom. We are happy to assist your Tax Department to reclaim your German WHT.

On November 29, 2019, the so-called Annual Tax Act 2019 passed the German Bundesrat (upper house) and is expected to be enacted before the end of this year. The Act introduces, inter alia, the requirement to capitalise fund structuring costs, which are incurred during the investment period of closed-funds set up as partnerships. The costs are not tax-deductible, but must be capitalised instead. This new rule will apply retroactively and is the reaction of the German legislator to a decision by the German Federal Tax Court dated April 26, 2018, according to which fund structuring costs, which are incurred in the investment period of closed-end funds, do not need to be capitalised but instead are tax-deductible. We are pleased to assist your Tax Function to comply with the new rules.