16 June 2022 saw the ECJ issue its judgement in the case C-572 - “ACC Silicones”, ruling that certain prerequisites under German tax law for a refund of German WHT are incompatible with the free movement of capital (Art. 63 TFEU).
ACC Silicones is a British company that in the years 2006 to 2008 held 5.26% of the shares of a German company, which distributed dividends. These dividends were subject to 20% WHT (plus 5.5% solidarity surcharge) in Germany. The WHT rate was reduced to 15% under the German-UK Double Tax Treaty (DTT). Such German-sourced dividends would have been fully tax exempt if they had been subject to the Parent-Subsidiary-Directive (PSD), i.e. the foreign receiving company had to hold more than 10% of the shares.
By contrast, at that time, German companies were fully tax exempt with their German dividend income, regardless of their stake in the paying company. Although WHT was levied on dividends paid to German companies, German companies could credit WHT against their corporate income tax and, if the WHT was higher than the CIT, receive a WHT refund. In its previous ruling C-284/09 dated 20 October 2011, the ECJ prescribes that the respective German tax rules - which effectively granted a WHT refund to German companies - were incompatible with EU law. In 2013, as a response to this previous ECJ judgement, the German legislator introduced a mechanism to reclaim WHT levied on German free float dividends for EU/EEA companies. Additionally, Germany subjected all free float dividends paid after 28 February 2013 to CIT. The incompatibility of the German dividend taxation with the free movement of capital was supposed to have been abolished as a result of this revision. The refund mechanism is therefore mainly applicable to dividends paid before 1 March 2013.
To obtain a WHT refund under the new system, EU/EEA companies must fulfil several conditions, among them proving that neither the company nor any direct or indirect shareholder of the company received a tax credit for the German WHT in their country of residence. A carryforward of the tax credit or a cost deduction shall be equivalent to an actual tax credit. The lack of tax credit must be proven via a certificate from the tax authorities of the company’s country of residence. This condition of lack of tax credit is the specific subject of the recent ECJ judgement dated 16 June 2022.
The ECJ regards the condition to prove that no actual or potential tax credit was provided to the EU/EEA company in its country of residence as a breach of the free movement of capital, because a German company could obtain a WHT refund without having to prove any such condition. According to the ECJ, the additional prerequisite of the WHT refund solely for EU/EEA companies cannot be justified with preventing a double credit of the German WHT, because the same prerequisite was not made for German companies, even though a German company may also have a foreign shareholder, which might be able to credit the German WHT against its own tax liability. The additional prerequisite can also not be justified with safeguarding the balanced allocation of the power to tax between the member states.
The ECJ is very clear on the incompatibility of the above-described condition (proof of the lack of a tax credit) in order to obtain a WHT refund. Unfortunately, the court did not have to comment on other aspects of the German WHT refund system. One further critical aspect of the German WHT refund rule set is the limited personal scope. The WHT refund is only admissible for EU/EEA companies, i.e. excludes third-country companies as well as other entity types, such as investment funds.
The ECJ explicitly did not answer the questions as to whether this limited personal scope is in line with the free movement of capital, because the British company concerned was - at that time - an EU company. However, the ECJ highlights that the scope of the free movement of capital also includes third countries, but “the case law concerning restrictions on the free movement of capital within the European Union cannot be transposed in its entirety to movements of capital between member states and third countries, as such movements take place in a different legal context.”.
The ECJ also did not have to comment on the condition that the company seeking the refund must prove the prerequisites of the German Anti-Treaty-Shopping Rule, which is also considered to be incompatible with EU law in specialised literature.
Even though the ECJ decision is a step in the right direction and a positive sign for WHT reclaims not only in Germany but in the EU in general, its direct impact is limited as it only covers one aspect of the much-criticised German WHT refund provisions. The argument about the incompatibility of German dividend taxation until March 2013 - unfortunately - does not end here.
In July 2022, the German Ministry of Finance (BMF) submitted a draft administrative guidance on the duty of cooperation related to cryptocurrencies and other tokens. This recent draft guidance is supposed to amend the administrative guidance on income taxation of cryptocurrencies and other tokens dated 10 May 2022.2
Taxpayers in Germany are generally obliged to cooperate with tax authorities. This general obligation includes declaring all relevant facts honestly and submitting the available evidence. According to the draft guidance, this general duty to cooperate must be fulfilled also with regard to income from cryptocurrencies and other tokens.
Besides the general obligation, there is an increased duty to cooperate with respect to circumstances taking place outside of Germany. Under the increased duty to cooperate, the taxpayer does not only have to provide the evidence available, but also procure new evidence. If the duty to cooperate is not observed, tax authorities are allowed to estimate the tax base.
According to the draft decree, the increased obligation to cooperate must be observed in connection with (crypto) tokens traded on a platform run by a foreign, i.e. non-German, operator and with regard to (crypto) tokens traded on a decentralised trading facility (Decentralised Exchanges “DEX”), which enable the user to trade directly without the facility acting as intermediary. As most of the (crypto) tokens are traded via a DEX or a non-German operator, the increased obligation to cooperate will most likely be the standard case for (crypto) token transactions.
Besides the tax legal duty to cooperate, the general obligations to keep records under commercial and tax law for businesses must also be observed with regard to (crypto) tokens. The BMF emphasises the obligation to keep records of and track every single transaction. If no other evidence is available, taxpayers may also keep records with screenshots and printouts. If records are kept with a (special) software, a procedure documentation must be prepared and the requirements of immutability observed. If the recordkeeping runs on a blockchain (or other DLT), immutability will be observed, as it is one of the core strengths of this technology. Additionally, when setting up software for keeping records, one should bear in mind that in the event of a tax audit, access to the software for review must be granted to the tax authority.
As far as private persons are concerned, the draft guidance lists possible evidence that may be required by the tax authorities. This includes, for example, wallet addresses, a wallet inventory as per 31/12 of each calendar year, purchase- and disposal-related data (e.g. price in €, timing, type of purchase/disposal, etc.), documentation of determination method (e.g. FiFo, average method).
The draft decree is open for comments until 29 August 2022.
As of 18 June 2022, fund units in Germany can be issued as crypto assets. The third of June 2022 saw the German Ministry of Finance (BMF) and the German Ministry of Justice (BMJ) publish the respective regulation on crypto fund units. The regulation follows the introduction of digitalised and crypto assets in Germany in June 2021.3
The regulation allows for fund units or share classes of fund units to be issued as “crypto fund units”. Crypto fund units are defined as digitalised fund units entered into a crypto register, meaning a decentralised and most likely DLT-based register. The scope of crypto fund units is limited to funds in a contractual format (Sondervermoegen), i.e. units of funds in a corporate format may not be issued as crypto fund units. This prerequisite is in line with the scope of digitalised fund units and securities, which also do not permit the issue of shares of a company or of a fund in corporate format as a digitalised asset. However, the current German government - and especially the Ministry of Finance - emphasised its willingness to extend the scope of digital and crypto securities to stocks within the next three years.
Even though the law foresees a decentralised register, a so-called register-keeping body is necessary to fulfil certain regulatory tasks. The register-keeping body is usually the fund custodian. However, the fund custodian may appoint another institution - that has the supervisory law permission to operate a crypto register - as the register-keeping body. This is a fundamental difference to other decentralised registers, where the issuer appoints the register-keeping body. Furthermore, the fund custodian may only appoint another institution as the register-keeping body if the fund custodian ensures it remains compliant with its own supervisory legal obligations. It therefore needs to be seen whether a new business of crypto fund unit registrants will develop, or whether the register-keeping will remain with the well-established custodians.
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