Germany: Trade tax treatment of dividend from dual resident corporation (tax court decision)
Only 5% of the dividend distributed by a dual resident corporation (DRC) to its German parent corporation was subject to trade tax in Germany.
Dividend from dual resident corporation (tax court decision)
The German Federal Tax Court (BFH) held (file ref. I R 43/18) that only 5% of the dividend distributed by a dual resident corporation (DRC) to its German parent corporation was subject to trade tax in Germany.
Background
Any corporation that maintains a permanent establishment in Germany is subject to German trade tax under Section 2 of the German Trade Tax Act (GewStG). Trade tax is calculated based on trade income. According to the German Corporation Tax Act (KStG), trade income refers to the calculated profit from business operations, which is increased or decreased through add-backs or reductions pursuant to the GewStG. However, only 5% of dividends received are subject to trade tax if the recipient holds at least a 15% interest in the corporation paying the dividends and the corporation paying dividends either:
- Has its registered office and place of effective management abroad (Section 9 No. 7 GewStG), or
- Is a domestic corporation within the meaning of Section 2 GewStG (Section 9 No. 2a GewStG)
Summary
A German limited liability company (GmbH) received a dividend distribution from a wholly owned subsidiary that had its place of effective management in Germany and its registered office in Belgium. The sole managing director of the subsidiary resided in Germany and operated from there. In dispute was whether the dividend received by the GmbH was subject to trade tax in full or only at 5%.
The tax office was of the opinion that a "domestic corporation" within the meaning of Section 9 No. 2a GewStG can only be a corporation that has its registered office and place of effective management in Germany, and thus the dividend was fully subject to trade tax. The BFH, however, held that the wording of Section 9 No. 2a GewStG with respect to "domestic" was not limited to corporations with their registered office and place of effective management in Germany, but also covered corporations that had their registered office abroad and only their place of effective management in Germany. As a result, only 5% of the dividend was subject to trade tax. The BFH explicitly left open whether the 5% rule would apply if the corporation paying dividends had its registered office in Germany and its place of effective management abroad.
Read a November 2022 report [PDF 873 KB] prepared by the KPMG member firm in Germany
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