Recast of sec. 50d (3) ITA (“Anti-Treaty Shopping”) according to AbzStEntlModG

Background

The provision of sec. 50d (3) ITA serves to prevent the misuse of benefits from double taxation agreements (DTA) and on the basis of EU law for income subject to tax deduction through the interposition of foreign companies (so-called treaty shopping). If the conditions set out in sec. 50d (3) ITA are met, foreign companies are no longer entitled (in whole or in part) to a refund of or exemption from German withholding tax.

In a number of decisions (Deister Holding, GS, N-Luxembourg 1, T Danmark, etc.), the ECJ has determined that the current version of sec. 50d (3) (or its predecessor) is (partially) contrary to European law due to its blanket presumption of abuse. The recast of sec. 50d (3) ITA-Draft as amended by the AbzStEntlModG is intended to take this into account and also implement the minimum standard of art. 6 of the Anti Tax Avoidance Directive (ATAD).

New provision of sec. 50d (3) ITA-Draft

Under the planned new provision in sec. 50d (3) ITA-Draft, there is a presumption of tax avoidance with the possibility of proof to the contrary; in addition, listed companies are excluded from the scope of the provision.

Unlike before, the new regulation is to apply directly only to claims for relief from capital gains tax or from tax deduction pursuant to sec. 50a ITA on the basis of a DTA. However, due to the references in sec. 43b (Parent-Subsidiary Directive) and sec. 50g ITA (Interest and License Directive) as well as sec. 44a (9) ITA (unilateral reduction to 15% for limited taxpayers), sec. 50d (3) ITA-Draft must be observed accordingly for the relief claims regulated therein.

Pursuant to sec. 50d (3) ITA-Draft, a corporation, association of persons or estate shall not be entitled to relief from capital gains tax and tax withholding pursuant to sec. 50a ITA on the basis of a DTA insofar as

1. Persons have an interest in it or are beneficiaries under the articles of association, the foundation business or the other constitution to whom this entitlement would not accrue if they received the income directly, and
2. the source of income has no substantial connection with an economic activity of this corporation, association of persons or estate; the earning of the income, its transfer to participating or beneficiary persons as well as an activity insofar as it is carried out with a business operation that is not appropriately set up for the business purpose shall not be deemed to be an economic activity.

This provision shall not apply insofar as the corporation, association of persons or estate proves that none of the main purposes of its involvement is the obtaining of a tax advantage, or if substantial and regular trading takes place on a recognized stock exchange with the main class of shares in it. Sec. 42 Fiscal Code remains unaffected.

Personal scope

While the current version of sec. 50d (3) ITA is linked to “foreign companies”, the draft by means of a “clarification” is applicable to all corporations, associations of persons and estates (hereinafter simplified as corporation) and, in addition to shareholders, also other beneficiaries who benefit from the income of the corporation in a comparable manner (e.g. beneficiaries of a foundation). Due to the deletion of the reference to foreign corporations only, possible misunderstandings in cases of double residency of the corporation shall be avoided.

By means of the so-called “look-through approach”, it is to be examined whether the relief claim would be due to the shareholder or other beneficiary participating in the corporation if the shareholder or other beneficiary would directly generate the income (hypothetical relief claim). If the shareholders or other beneficiaries are also corporations, associations of persons or estates, sec. 50d (3) ITA-Draft must also be taken into account when examining their hypothetical entitlement to relief.

Furthermore, the hypothetical claim for relief of the shareholder or other beneficiary shall in the future be subject to a stricter requirement, it needs to be based on the same claim standard as the entitlement to relief of the corporation itself is based. The requirements are not to be met if the hypothetical claim of the shareholder or other beneficiary arises, for example, from a DTA, but the relief claim of the corporation arises from sec. 43b ITA. A relief claim that is only identical in amount shall not be sufficient to exclude the presumption of abuse (still possible: proof of the existence of significant non-tax reasons for the involvement of the corporation, see below). If the hypothetical entitlement to relief of the shareholders is not given, the claim to relief shall be completely denied.

Material scope of application

The second prerequisite for the presumption of tax avoidance is that the source of income has no material connection with an economic activity of the corporation. An only partially ascertainable material connection with an economic activity of the corporation shall not lead to a complete, but only to a partial denial of the relief, e.g. if one of several held participations does not show a corresponding connection to the own economic activity of the corporation.

This connection must be substantial in the sense that the economic function or origin of the source of income may not only play a completely subordinate role with regard to the corporation’s own economic activity. According to the explanatory memorandum, this is not the case, for example, if the economic activity of the corporation consists solely of providing supporting services to one or more subsidiaries (e.g. in the area of accounting or legal advice). As a result, it must be economically comprehensible why the corporation in particular holds the source of income. This may be the case if the source of income serves its current economic activity, has only served its previous economic activity or has arisen from it, for example, by investing funds arising from its own economic activity in a shareholding.

The wording of the new provision suggests that an improper forwarding of the income generated should not only be assumed at the time of its actual forwarding, but already at the time of the contractual obligation to forward it; in practice, this could become relevant, for example, in the case of the retention of profits.

Furthermore, in the case of so-called passive investment management by the corporation, in which it does not engage in any significant activity beyond the receipt of dividends and, if applicable, their onward transfer (e.g. as a loan to its shareholders), no economic activity is to be present. In such a case, the required material connection shall not be ascertainable from the outset.

In contrast, according to the explanatory memorandum, the so-called active investment management of a holding company (management holding) shall constitute a sufficient economic activity, even if its income consists solely of the dividends of the subsidiaries.

Finally, the assumption of an economic activity is to be ruled out if and to the extent that the activity of the corporation is not carried out with a business operation appropriately set up for the business purpose. Contrary to the previous provision of sec. 50d (3) 2 ITA – which has not been adopted in the draft – according to which only the circumstances (substance) at the corporation itself are relevant, in the future the substance of affiliated companies as well as activities outsourced to third parties should also be included in the overall assessment.

Possibility of counterevidence

However, the corporation shall be able to rebut the presumption of tax abuse due to its interposition in accordance with the so-called principal purpose test. Insofar as it can be proven that none of the main purposes for its intermediation is the attainment of a tax advantage, the claim for relief shall not be excluded. In this context, all non-tax reasons are to be taken into account. Therefore, reasons such as low company law and regulatory requirements, easy access to the capital market, political stability and a business-friendly climate should be evaluated on a case-by-case basis. If only partial proof can be provided, the relief should accordingly only be granted in part.

Stock exchange clause

Even without the aforementioned proof to the contrary being successful, a corporation is to be entitled to relief – as before – if substantial and regular trading takes place in the main class of its shares on a recognized stock exchange (so-called stock exchange clause).

According to the explanatory memorandum, however, this exception to the presumption of an abuse of tax planning will in future only apply if the corporation itself is a listed company, but not if listed companies only directly or indirectly hold an interest in the corporation claiming relief, as listed companies can also engage in tax planning abuse. In the latter constellation, the exception for listed companies is merely intended to mean that the provision of sec. 50d (3) ITA-Draft does not apply when examining the hypothetical entitlement to relief at the level of the listed company that holds a direct or indirect interest. This means that the so-called “look through approach” does not apply and the hypothetical entitlement to relief of the shareholders and other beneficiaries behind the listed company is not relevant.

The draft law sees a further tightening in comparison to the previous legal situation in the deletion of the exception for investment funds previously contained in Section 50d (3) 5 ITA.

Temporal scope

The new regulation is to be applied in all open cases unless sec. 50d (3) ITA in the version applicable at the time of the inflow of income does not preclude the entitlement to relief. This “favorable review” is intended to avoid an impermissible retroactive effect.

Conclusion

It remains to be seen whether the draft version actually complies with the requirements of European law.

It is currently unclear whether the amendment to the act leads to a "discontinuation of the requirements" within the meaning of sec. 50d para. 2 sent. 4 second half ITA and thus to a notification obligation for the creditor of the investment income or remuneration within the meaning of sec. 50a ITA or whether there is protection of legitimate expectations with regard to exemptions already granted. If you are affected by this question, please do not hesitate to contact us.