Germany: Tax court rules dividends exempt from trade tax if treaty provides exemption

The local tax court of Düsseldorf has ruled that dividends distributed by a foreign subsidiary are exempt from German trade tax at the level of the German parent company if the applicable tax treaty provides for a participation exemption, even if the requirements of the Trade Tax Act are not met.

The case involved a German corporation that did not hold the shares in its foreign subsidiary throughout the entire fiscal year because it sold the shares before year end. As a result, the tax authorities denied the participation exemption. The court stated that tax treaties take precedence over domestic law and that, because there is no general treaty override provision in German domestic law, any treaty override would have to be specifically provided in the law and, therefore, the participation exemption in the treaty applied irrespective of the local trade tax rules.

Even though not necessary for the decision, the tax court said that, in its view, the dividends also would have been exempt under domestic rules. According to the court, the participation exemption for trade tax purposes only requires that the parent hold the shares in the subsidiary from the beginning of the tax year for trade tax purposes – it does not include any specific rule requiring the shares to be held until the end of the tax year. The case is pending before the Federal Tax Court.