Germany: Foreign insurance company - Cologne fiscal court grants reduction of German WHT to 0%

In its decision of 20 April 2023, the Cologne Fiscal Court awards a Belgian (composite) insurance company a refund of German WHT suffered on German portfolio dividends in 2009 (from 15% to 0%) under the free movement of capital of European law (Article 63 TFEU). The decision is not yet final, as the German tax authority appealed before the German Federal Fiscal Court (“BFH”).

The ruling is good news for foreign insurance companies whether domiciled in the EU or in third countries (in particular life, health and pension insurance companies) that suffered WHT on their German dividend income and seek to recover such WHT. The current German decision reflects comparable developments in other EU jurisdictions.
 

German case law landscape

German WHT reclaim applications have been submitted by investment funds for over a decade un-der the label of "Fokus-Bank" claims. While the case law issued by the CJEU in relation to Fokus-Bank claims by regular investment funds already led to a change in German legislation and thus supposedly to the abolishment of an infringement on the free movement of capital, there is still uncertainty in the area of insurance companies, in particular for life insurers and pension schemes such as pension funds.

In its decision in the case (C-641/17) "College Pension Plan of British Columbia" (“CPP”), the CJEU clarified that the de facto tax exemption of a German pension fund (“Pensionsfonds”) - due to the possibility to recognize tax-deductible insurance technical reserves in Germany, while foreign pension schemes comparable to a German Pensionsfonds are denied such possibility to decrease their tax base - principally results in a disadvantageous tax treatment of the foreign pension scheme and thus in a breach of Article 63 TFEU.

With regard to reasons for justification of such limitation, the CJEU addressed the comparability of the tax-legal situation of a German Pensionsfonds and a Canadian pension fund under the aspect of a "direct link" between the income in the form of dividends and the deductible expenses (via the formation of insurance technical reserves). The CJEU held that it is necessary that the foreign pension fund "voluntarily or in accordance with the law applicable in its state of residence” allocates the dividends received from Germany to provisions for retirement benefits.
 

The Cologne Tax Court decision of 20 April 2023

 It is noteworthy that the Fiscal Court of Cologne in its recent judgement dated 20 April 2023 concerning a Belgian (composite health and) life insurance company accepts and applies the principles set out by the CJEU in the "CPP" decision concerning a Canadian pension fund, without prior reference to the CJEU. This fiscal court is now competent for all German WHT reclaim proceedings based on the EU free movement of capital.

In the CPP case, the claimant Canadian pension fund was ultimately denied a refund of German WHT as the referring Munich Tax Court found that the claimant had not sufficiently demonstrated such direct link between German dividend income and expenses via the formation of insurance technical reserves in its balance sheets.

As certain German insurance companies (in particular life and pension insurers as well as health insurers) - similar to German pension funds - establish tax-effective reserves for their obligations to policyholders, while this option is not available to comparable foreign insurance companies under German tax law, the Cologne Tax Court finds such German tax law to be in breach with the EU free movement of capital under Article 63 TFEU.

The Cologne Tax Court therefore refrains from applying the relevant German tax law provisions which would have led to the taxation of the German outbound portfolio dividends of the Belgian insurance company. The court decides that the Belgian insurance company sufficiently demonstrated a “direct link” within the meaning of the CPP decision of the CJEU and is entitled to the WHT refund.
 

Implications of the Cologne decision

The decision of the Cologne Fiscal Court is a positive development insofar as it clarifies that the infringement on the free movement of capital as recognized by the CJEU in the CPP case with regard to the lack of possibility for foreign pension funds to assert technical provisions for tax purposes also applies to foreign life insurance companies.

Insurance companies domiciled in the EU or in third countries, in particular life and health insurers as well as foreign pension funds, which do recognize technical reserves in their balance sheets, should take the judgment of the Cologne Tax Court as an opportunity to evaluate the chances of success of the reclaim of German WHT suffered on dividend income from portfolio holdings in Germany equity.

Applications for the refund of German WHT can be submitted retroactively for a maximum period of four years, i.e. until the end of 2024 for the years 2019 to 2023.

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