Germany: Digitalization of tax law and tightening of WHT process

Germany keeps pursuing the route towards tax transparency and digitalization of tax law, just like several other EU member states. In addition, a tightening of the possibility to reclaim German WHT, e.g. by fund vehicles, is on the way.

The international financial services industry, including mutual, hedge and private equity funds, ought to prepare.

Background

• Data privacy protection, the Holy Grail of German government attitude supported by Constitutional Court decisions over many years, is on the retreat, at least: in the context of tax law.
• Germany witnessed several tax scandals over the last years, most prominently the Cum-Ex issue: a diffuse WHT reclaim process was abused for obtaining multiple tax refunds of WHT which had only been levied once. Several legislative changes were enacted since and the legislator continuously aims at preventing tax fraud, occasionally overshooting the mark.
• Both houses of the German parliament recently decided to make use of the individual’s tax identification number as a general “Citizen-ID” in several contexts, e.g. for purposes of the population register, the register of driving licenses or the weapon register. This step is expected to significantly ease the digitalization of administrative tasks of numerous kinds. The law will come into effect soon.

Next steps – draft bill

One of the next steps recently announced by the German government, presented in the form of a draft bill and declared as motivated by the tax fraud prevention strategy, is related to German WHT on dividends.

The draft bill effectively aims at a complete overhaul of the German WHT system. The revised process is not limited to the retroactive WHT reclaim procedure as such, it also covers the stage of the original deduction of German WHT by the German paying agent of the dividend.

The revised rules also target mutual, hedge and private equity funds suffering German WHT on dividend income and their (often) multi-tiered custodians. Thus, the draft bill will have an – at least: operational tax – impact on the administrators and custody banks of international fund vehicles.

The plan is to enhance tax transparency via centrally collecting tax relevant data in combination with the digitalization of the WHT deduction and the refund process. The implementation of additional reporting obligations for WHT payers as well as parties involved in the process of distributing capital income and levying WHT, such as custodians or clearing houses, is generally in line with international developments such as the EU’s Anti Tax Avoidance Directive, the implementation of DAC6 (soon to be followed by DAC7) and the OECD’s Inclusive Framework on Pillar One and Two.

The draft bill has entered the parliamentary process; the specific rules described above are intended to become effective in 2024.

Without going into the detail of the 180-degree-turn in German WHT policy, we would like to highlight the following:

• For the first time, a central data base related to WHT will be kept on the level of the German Federal Office of Finance (“BZSt”). The intent is not limited to collecting the data necessary to match the amount of WHT levied with the amount of the claim for a refund; also the identity of the recipient of the dividend subject to WHT shall be reported, so as to be able to match the WHT refund claim with the original recipient of the dividend.
• As part of centralizing the WHT refund decision competence, all applications for WHT relief at source or retroactive refund launched by non-German tax payers will have to be filed with the BZSt, regardless of whether the application is due to German national law, or to a benefit under a double tax treaty (DTT) or is based on the argument of discriminatory treatment according to EU law (the case law of the European Court of Justice related to the free movement of capital). Additionally, non-German investment funds will no longer be able to receive a reimbursement of WHT from the original paying agent of the specific income stream, but all of the investment fund’s reclaims will have to be filed centrally with the BZSt. Please note that the change in centralized competence of the BZSt will become effective with the adoption of the draft bill (not: in 2024, like the other revisions described).
• Foreign payers of WHT will have to instruct the paying agent of the dividend to report to the German tax authority in electronic format their relevant data, i.e. the current paper based process will be replaced by an electronic reporting.
• The paying agent only reports to the tax authorities if so instructed by the tax payer; the report has to be filed immediately after every inflow of income; it is thus advisable for many non-German tax payers to give the paying agent a general instruction to report (not: a consent on a case to case basis).
• The before described report replaces the tax certificate in cases where an investment fund with limited tax liability applies for a relief from WHT with the BZSt; which means that less paperwork has to be filed and forwarded to the German tax authority.
• The additional reporting obligations are accompanied by an increase of liability of the paying agent. The agent will be liable for WHT which was levied incorrectly and for incorrect reporting of data. Additionally, in the case of intent or gross negligence, the agent might face a penalty of up to 20.000 EUR per case.

Besides the medium-term development depicted above, there is a further noteworthy development, which will be implemented soon, so the expectation.

At present, foreign (incorporated) investment funds are exempt from specific German national anti-treaty-shopping (LOB) rules, according to which - in a nutshell - the applicability of a treaty benefit is rejected, if the beneficial owner of the entity claiming the benefit is not entitled to the benefit himself and if the relevant income is not related to an own economic activity of the entity. These current rules have come under scrutiny by the European Court of Justice.

In the future, based on the draft bill, the current exemption applicable to non-German investment funds shall be deleted. Thus, if a fund vehicle will seek WHT relief under a DTT to less than the rate of 15%, the new anti-treaty-shopping rules will gain importance.

The good news is that many foreign investment funds qualify for and have already received the so-called Statusbescheinigung (acc. to § 7 Abs. 1 InvStG), to be passed to the German paying agent of the dividend. The effect of the named certificate is a reduction of the German WHT at source from the standard national rate of 26,375% to 15%.

CJEU case “CPP” - C-641/17

In our last client letter (# 19-2021), we introduced the impact of the European Court of Justice case C-641/17 - “College Pension Plan of British Columbia” (CPP case, covering the years 2007-2010), according to which a tax rule preventing a Canadian pension fund from reclaiming WHT on German dividends is contrary to the free movement of capital because a resident pension fund is allowed to credit / receive a reimbursement of such WHT. The specialty of the CPP case is the look-through-approach applied by the CJEU: the Canadian pension fund did not invest directly into German equity assets, but via a pooled investment portfolio. The CJEU disregarded this fund structure in the context of determining the comparability.

In our last client letter, we described the possible impact of this look-through-approach for pension funds on WHT reclaims based on a discriminatory treatment in different EU jurisdictions.

As a follow-up, we would like to emphasize the importance of the timing aspect for WHT reclaims based on the CPP case in Germany, in comparison to WHT reclaims based on other CJEU cases applicable to investment funds, such as C-480/16 - Fidelity Funds and C-156/17 - Koeln Aktienfonds Deka - (“Investment Fund Reclaims”).

The discriminatory treatment of non-German investment funds with regards to WHT ended with effect from 1 January 2018; Investment Fund Reclaims for WHT suffered on German dividends in 2017 can be filed until December 2021.

In comparison, the discriminatory German legislation which gave rise to the CPP case has not been changed yet. The discrimination against non-resident pension funds - structurally comparable to resident pension funds - therefore continues.

Thus, reclaims for WHT suffered on German dividends based on the CPP case can be filed not only for the year 2017 but also for subsequent years. As the general statute of limitations in Germany is 4 years, for example, a claim for the refund of WHT suffered in 2018 can be filed until the end of December 2022.

If you wish to discuss these topics, please contact: WTS Germany, Frankfurt

Read the WTS Global Financial Services Newsletter here.