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European Court of Justice finds current German anti-treaty shopping rule violates EU law

By Dr Raimund Behnes | DLA Piper

Following its recent joint decision on Deister Holding (C-507/16) and Juhler Holding (C-613/16) on the former version of the German anti-treaty shopping rule (see earlier insights), the European Court of Justice (ECJ) has now decided that the current version of Germany’s anti-treaty shopping rule, as widely expected, is also incompatible with the EU Parent-Subsidiary Directive and infringes the EU freedom of establishment (ECJ decision C-440/17). This outcome renders the German anti-treaty shopping framework in its current form invalid and will thus have significant impact in particular on outbound dividend and license payments that originate from German entities.

Facts and Reasoning

In the latest case (C-440/17), GS, a Dutch holding entity, held shares in several subsidiaries resident in different jurisdictions, including more than 90 percent of shares in a German corporate entity. In 2013, GS had three different functions, ie financial and administrative management of its subsidiaries, funding of these subsidiaries through the provision of loans, as well as trading of raw materials that were acquired from third parties outside the EU and sold to its subsidiaries. GS maintained two office rooms and employed three persons for this purpose. GS’ sole shareholder was an entity resident in Germany.

Withholding tax levied on dividends distributed by the German subsidiary to GS in 2013 was not refunded by the German tax authorities as they applied the current version of the anti-treaty shopping rule (sec. 50d (3) German Income Tax Act (GITA)). Sec. 50d (3) GITA in the currently applicable version would principally allow treaty benefits for a foreign intermediary only

  • To the extent the foreign intermediary derives income from performing own economic activities, or
  • Economic or other substantial reasons for interposing the foreign entity are present, and the foreign entity engages in general economic trading with its trade or business being sufficiently equipped for its business purpose

Based on these conditions, the German tax authorities rejected the application for refund despite the functions performed by GS, as they, in line with their usual practice, narrowly interpreted these conditions. The tax authorities held, in particular, that mere asset management activities were performed by GS, which would not qualify as performing its own economic activities.

The ECJ decided this case along the lines of the Deister and Juhler Holding cases, mainly confirming that sec. 50d (3) GITA in its current version also is incompatible with EU law as the provision does not specifically address wholly artificial arrangements that could lead to tax fraud or abuse. The rule contains generic conditions which determine abuse in a broad-brush manner and thus would catch many arrangements that may not be abusive in nature. The rules would also set an irrefutable presumption that tax fraud or abuse was proven once the generic conditions were fulfilled, and would neither necessitate the tax authorities to test the individual merits of a case, nor give the taxpayer an opportunity to provide evidence of economic reasons for the chosen structure.

While in this reasoning the ECJ has mostly reiterated statements already made in Deister and Juhler, it also expressly makes clear that even the interposition of a foreign entity that does not have own activities and only utilizes its subsidiaries for carrying out activities would in itself not indicate abuse or fraud. Likewise, a mere management of assets by the foreign entity would not per se indicate abuse as currently assumed by the law.


Following the ECJ joint decision on Deister and Juhler Holding on the previous version of sec. 50d (3) GITA, the German Ministry of Finance published a decree on 4 April 2018 in which it attempted to align the current provisions with EU law. The scope of the decree is, however, limited in several ways. For example, only dividend payments subject to EU-Parent-Subsidiary Directive are covered by the decree, so that, among others, license fee payments that are subject to withholding tax have been excluded. The decree also left unanswered, in light of EU law, how ‘own economic activities’ of the foreign intermediary should be defined, in particular when considering allegedly harmful asset management activities.

Given the latest ECJ decision, it is expected that the German anti-treaty shopping law will be amended in the near future. Practical experience also seems to indicate that the German Federal Tax Office may have already changed its position, focusing more on the level of actual substance of an applicant entity rather than the technicalities of the wording of the law.

Key Takeaways

Businesses should welcome the latest decision as it generally increases their ability to demonstrate legitimate corporate or business motives when applying for a withholding tax reduction or exemption under a tax treaty or an EU Directive in Germany. Thus, the decision may, depending on the merits of each individual case, materially improve the filing position of an applicant if it leads to the abolishment of a rather formalistic practice of the German tax authorities. Having said that, taxpayers should not jump to the conclusion that the German tax authorities will lower its standard of scrutiny when analyzing cross-border arrangements, but rather should expect more room for discussion that could be meaningful for both sides. Taxpayers should thus be prepared to have relevant substance in place that may well exceed what the ECJ is considering as sufficient.

The latest ECJ decision will be important for the cross-border repatriation of profits/dividends from German operations and may have ramifications on the corporate structure that is used for holding German subsidiaries. The decision will also have a significant impact on the licensing of rights into Germany and particularly on businesses that market and exploit patents and other rights in Germany. Any group reorganizations that may affect these payment streams that are subject to German withholding tax should, where possible, be timed carefully so that any upcoming change of law can be taken into consideration.

Compliments of DLA Piper, a member of the EACCNY