In its judgement of May 22^nd, 2019 (I R 11/19) the German Federal Tax Court decided that in certain cases the German controlled foreign company (CFC) taxation may violate EU law. The judgement concerned controlled-company income from invested capital (so called Zwischeneinkünfte mit Kapitalanlagecharakter) with respect to third countries. In particular the missing opportunity to provide evidence to show that a shareholding in a low-taxed third country company is not the result of an artificial scheme was at question. In contrast to third country investments, the tax payer has indeed such opportunity to provide counter evidence since the judgement of the European Court of Justice concerning Cadbury-Schweppes for comparable investments within the European Union. In its judgement the German Federal Tax Court decided that a missing opportunity to provide counter evidence in a third party context indeed restricts the free movement of capital. However, such restriction might in certain circumstances be justifiable. According to the judgement at hand, a permissible circumstance is a situation, where the financial authorities are not able to verify the information provided by the tax payer in his counter evidence. According to the German Federal Tax Court this was indeed the case, as the judgement concerned an investment in a Swiss company in the years 2005 and 2006. During these years the ability to exchange information was limited between Switzerland and Germany. Only later in 2010 a broader clause to exchange information was implemented in the double tax treaty between Switzerland and Germany.

Even though the German Federal Tax Court ruled in this present case that the restriction of the free movement of capital was justifiable, the judgement implies that in a situation with sufficient exchange of information (which is meanwhile standard in most double tax treaties) the restriction of the free movement of capital may not be permissible. In other words, the German controlled foreign company (CFC) taxation may in certain circumstances violate EU law.