ECJ rejects German anti-treaty/directive-shopping rule


In its landmark decision dated 14 June 2018 in Case GS, the European Court of Justice (“ECJ”) concluded that the German anti-treaty/directive-shopping rule is not in line with the European fundamental freedom of establishment and the EU-parent-subsidiary-directive. The German anti-treaty/directive-shopping rule sec. 50d para. 3 German Income Tax Act (“ITA”) constitute an obstacle for many inbound investments. Generally, withholding tax on certain cross-border income such as dividends or royalties may be reduced or even eliminated for eligible persons based on the parent-subsidiary-directive or the relevant double tax treaty. However, in Germany an exemption or reimbursement of withholding tax requires an application to the German tax authorities. Only if the strict substance requirements as stipulated in sec. 50d para. 3 ITA are met, the application will be approved.

In particular holding companies are often not able to meet these conditions as it is required that the income recipient performs an own business activity which goes beyond the mere holding of participations. In the worst case that means that a withholding tax of 25 % is levied and no relief is granted.

Already in December 2017, the ECJ ruled in Case Deister Holding that the former version of the German anti-treaty-shopping rule applicable until 2011 violates European law and is not in line with the parent-subsidiary-directive.

Recent ECJ decision

In its recent decision of 14 June 2018 in Case GS, the ECJ came to the conclusion that also the current version of the German anti-treaty/directive-shopping rule violates the freedom of establishment and the parent-subsidiary-directive.

According to the ECJ, a member state cannot predicate the parent-subsidiary-directive on certain conditions and presume a general fraud or abuse. Instead, the rule needs to be precise in preventing tax evasion or abuse, so that it complies with the principle of proportionality. Furthermore, it is essential that each case is examined individually and the taxable person has the possibility to provide counterevidence.


Thus, there is generally a need of an amended law that considers these clarifications and is limited to wholly artificial constructions to be in line with European law. In response to the first decision regarding the former German anti-treaty/directive-shopping rule and obviously in anticipation of the latest court decision, the Federal Ministry of Finance has published a tax decree on 4 April 2018. According to this decree, which only considers dividend distributions, the German anti-treaty/directive-shopping rule for the years 2007 - 2011 is abolished and the current rule shall be relaxed. With regard to the latest ECJ decision, these changes in the application of the law appear to not be sufficient.

Tax payers should consider challenging rejected withholding tax refund claims based on the former and current sec. 50d para. 3 ITA. In case such tax refund claims have not yet been made, tax payers should request a refund of withholding tax withheld in a timely manner because of the time limitation for reimbursements.

Although the ECJ’s decision only deals with dividend distributions to shareholders resident in the EU, their rationale may also be transferable to other cross-border income items such as royalties and interest income.

Further, based on settled ECJ case law, sec. 50d para. 3 ITA in its former and current version should also constitute an infringement of the free movement of capital. The rule is not limited in scope to shareholdings which give its holder definite influence over the company’s decisions. Thus, irrespective of the actual facts of the case, an inbound investor resident in a non-EU country may invoke the free movement of capital which geographical scope is not limited to the EU and challenge rejected withholding tax refund claims on the basis of the recent ECJ decisions.

Authors: OIiver Middendorf and David Eberhardt, HLB Germany, HLB Dr. Stückmann und Partner mbB

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