Crediting of US withholding tax against German trade tax
The Berlin-Brandenburg Tax Court has held that the Germany-US tax treaty requires US withholding tax on dividends to be credited against German trade tax even though the German Trade Tax Act does not contain provisions comparable to the corporation tax credit rules.
Double taxation frequently arises in cross-border situations due to the broad application of the worldwide income principle. Tax treaties generally mitigate or eliminate double taxation. If an applicable treaty does not provide for the exemption method to eliminate double taxation, foreign taxes are typically credited against German income or corporation tax; alternatively, foreign taxes may be deducted from the German tax base. Germany’s Income Tax Act (EStG) and Corporation Tax Act (KStG) both contain relevant credit and deduction mechanisms.
Facts of the Case
In its January 14, 2026 decision (case no. 10 K 10106/23), the Fiscal Court of Berlin-Brandenburg considered whether US withholding tax on dividend income could be credited against German trade tax. The case involved a German limited liability company (GmbH) that acquired approximately 26% of the shares in a US stock corporation in November 2020. The GmbH received a dividend the following month on which a 5% withholding tax was levied in accordance with the Germany-US tax treaty. The dividend was not considered for corporate income tax purposes pursuant to Section 8b KStG (Germany’s participation exemption) because the acquisition of a minimum 10% stake in a company during the year is deemed to have taken place at the beginning of the calendar year, meaning that the conditions for application of the participation exemption were met
Since there is no corresponding fiction in the trade tax law and the German company did not yet own the shares at the beginning of the assessment period, the dividend was subject to trade tax. The GmbH sought to credit the US withholding tax against its trade tax liability, arguing that the dividend was subject to double taxation and that the treaty, which specifically lists the German trade tax as an in-scope tax on income, overrides domestic law. The issue arose only because of the specific situation: namely, that the dividend was exempt from corporation tax but remained taxable for trade tax purposes.
Decision of the Court
The fiscal court found that double taxation existed because both Germany and the US imposed a comparable tax on the same taxpayer, for the same taxable item and for the same period. The treaty relief from double taxation article refers broadly to ‘income tax’, without distinguishing between income tax, corporation tax or trade tax. In the court’s view, the treaty’s purpose of preventing double taxation requires that foreign withholding tax be creditable against trade tax when trade tax also is a relevant German tax on the income. In the opinion of the fiscal court, the fact that trade tax is an object tax linked to the existence of a business and the exercise of business activities, or the strict domestic reference of trade tax law, does not preclude the inclusion of trade tax for credit purposes.
Notice
At first glance, crediting foreign withholding tax against German trade tax may seem unexpected, given the absence of an explicit crediting provision in the trade tax law. However, the outcome is consistent with the treaty’s purpose: where Germany imposes an additional tax on income - such as trade tax - double taxation should be relieved through a credit.
However, whether the Berlin-Brandenburg court’s reasoning will withstand an appeal to the Federal Fiscal Court (BFH) remains uncertain. In 2024, the BFH (decision of October 16, 2024 – case no. I R 16/20) held that foreign withholding taxes cannot be deducted when determining trade income. Although the legal framework for deductions differs from that for credits, the BFH noted (in point 23 of its decision) that parallels may exist between the two mechanisms. This observation leaves open the possibility that the BFH may take a more restrictive view of crediting foreign taxes against trade tax.
The Fiscal Court Hesse had already dealt with the question of whether and to what extent foreign withholding taxes can be credited against German trade tax in its legally binding decision of August 26, 2020 (case no. 8 K 1860/16) (see our Insight of March 11, 2021). The case concerned Canadian withholding tax that was retained on the dividends of a Canadian subsidiary. Here, too, the dividends were exempt from corporation tax but subject to trade tax, albeit due to a slightly different legal situation at that time. In the opinion of the Fiscal Court Hesse, double taxation in the legal sense occurred because, on the one hand, Germany levied a similar tax via its right of taxation under the DTT and, on the other hand, Canada levied a similar tax via the withholding tax deduction from the same taxpayer for the same taxable item and the same period. The Fiscal Court Hesse regarded the German trade tax as a German tax on income; in this respect, the foreign withholding tax could also be credited against the German trade tax by applying the income or corporation tax regulations accordingly. The Fiscal Court Hesse thus distances itself from the – albeit not entirely comparable – decision of the Fiscal Court Lower Saxony of March 18, 2020 (case no. 6 K 20/18), which was later confirmed by the BFH in its decision of October 16, 2024 (case no. I R 16/20) (see above).
