Tax Relief for German Non-Resident Companies
The German Federal Council’s amendment of the German anti-treaty-shopping (ATS) rule no longer requires a non-German resident company to generate more than 10% of its gross revenues through its own business activities. The amendment which is effective since January 1, 2012 was made in response to a European Commission infringement procedure against Germany. The amendment is relevant for Non-Resident Corporations (NRCs) that rely on a double tax treaty or the EU Parent-Subsidiary-Directive to claim an exemption from / reduction of German Withholding Tax (WHT).
New Amendments to the German ATS Rule
There are new rules in relation to payments received by NRCs which have been subjected to German WHT. Tax relief is available if the NRC is owned by shareholders that would be entitled to a corresponding benefit under a tax treaty/EU directive (had they received the income directly), or the NRC’s gross receipts are generated from its own genuine business activities
If the NRC does not satisfy neither of the above then it will be entitled to WHT relief as long as both of the following requirements are met in relation to its income that is not generated from its own genuine business activities:
- -there is a business purpose (economic or other relevant non-tax purpose) for the NRC being inserted in the middle of the payment route, and
- -The NRC has adequate business substance.
WHT relief is given on a pro-rata basis in relation to the proportion of the business activities of the NRC which relate to genuine business activities vs. non business activities (e.g. management of asset.
Earlier treaty benefits were denied in case a company which either relied on a double tax treaty or the EU Parent-Subsidiary-Directive and was not generating more than 10% of its gross income from its own active business activities. The European Commission felt that the 10% rule on income was disproportionate and it has therefore been abolished.
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