§ 8b KStG

According to the regulation for the taxation of disposal gains from intercompany shares (Section 8b (2) KStG), profits from the sale of shares in a corporation are exempt from corporate income tax whenever the seller is a corporation, too. Therefore, the capital gains are not included in the taxable income. However, 5 percent of the capital gain must be added back to the taxable income as a fictitious, non-deductible business expense and is therefore taxable income.

On 31 May 2017, the Federal Fiscal Court has published a decision (ref.: I R 37/15) against the regulation in Section 8b (3) (1) KStG concerning taxpayers subject to a limited tax liability and with no permanent establishment or permanent representative located in Germany.

1. Scope of tax exemption

According to the decision of the Federal Fiscal Court the addback of fictitious business expenses does not apply to capital gains in cases where the disposing entity does not have of a permanent establishment or a permanent representative in Germany. In addition, the appellant in the case at hand was a tax resident of Bermuda and thus did not benefit from a tax treaty.

2. Reasons for tax exemption

Pursuant to Section 2 (Nr. 1) KStG corporations without a domestic permanent establishment or a permanent representative on German territory are subject to limited tax liability with their domestic income.

According to the Federal Fiscal Court the adding back of fictitious business expenses (Section 8b (3) (1) KStG) cannot apply to a corporation without a domestic permanent establishment or a permanent representative in Germany as business expenses have to be attributed to a permanent establishment or representative.

The add back of the fictitious 5 percent can only raise the corporate income tax assessment base if the fictitious business expenses could be claimed by German tax authorities. For this they would have to be attributed to a permanent establishment or permanent representative on German territory

3. Outlook

On 07 February 2018 German tax authorities have decided to publish the decision from the Federal Fiscal Court in the Federal Gazette shortly. This means that German tax authorities will apply this decision going forward. It is unlikely that this decision will be applied to inter-company dividends as it was explicitly based on corporations with limited tax liability (Section 49 (1) (Nr. 2) e) aa) and Section 17 German income tax Act) and their intercompany disposal gains.