Deduction of foreign taxes in the tax group for trade tax purposes
Deduction of foreign taxes in the tax group for trade tax purposes
The consolidated tax group for income tax purposes (Sections 14 to 19 of the German Corporate Tax Act (Körperschaftsteuergesetz, KStG)) means, among other things, that the personal trade tax liability of the controlled company is attributed to the controlling company for the duration of the consolidated tax group and the trade tax assessment amount for the business operations belonging to the consolidated tax group is to be determined solely for the controlling company. In this respect, it is irrelevant that the integrated corporation, i.e. the controlled company, remains an independent business and its trade income must be determined separately. Against this background, in its decision of October 16, 2024 (case no. I R 16/20), the German Federal Fiscal Court (Bundesfinanzhof, BFH) had to clarify the question of whether the withholding tax withheld on foreign (free float) dividends can be deducted when determining the trade income in the tax group if the dividends are exempt from corporation tax at the controlling company and no trade tax reduction applies in this respect.
In the case in dispute, there had been a consolidated tax group for income tax purposes between X‑AG as the controlling company and Y-AG as the controlled company since 2006. In the year 2007, Y‑AG held shares of less than 10 % in various domestic and foreign corporations and received corresponding dividends (so-called free float dividends), which were subject to withholding tax in the respective country of residence. The tax office recognized the foreign free float dividends, including the foreign withholding tax due on them, when determining the corporate income taxable income at the level of Y-AG and exempted 95 % of the dividends from corporate income tax at the level of X-AG in accordance with Section 8b KStG. When determining the trade income of X‑AG, the tax office took into account the foreign free float dividends and the withholding taxes due on them in full, as the reduction regulations were not applicable to either domestic or foreign shareholdings (Section 9 No. 2a, 7, 8 of the German Trade Tax Act (Gewerbesteuergesetz, GewStG)) with regard to the so-called trade tax intercompany privilege. Both the Lower Saxony tax court in its decision of March 18, 2020 (case no. 6 K 20/18) and the BFH followed the tax office’s legal opinion.
Taking into account the relevant statutory provisions (Section 15 sentence 1 no. 2 sentence 1 KStG in conjunction with Section 7 sentence 1 GewStG), foreign withholding taxes on (free float) dividends that are 95 % tax-exempt when determining the income of the controlling company in accordance with Section 8b KStG cannot be deducted when determining the trade income of the controlled company. They are therefore included in full in the trade tax assessment basis of the tax group for trade tax purposes. Trade tax additions or deductions in accordance with Sections 8 and 9 GewStG were indisputably not applicable in the present case.
The deduction of foreign withholding taxes pursuant to Section 34c (2) EStG (exclusively) in the determination of trade income as requested by X-AG is already precluded by the reference in Section 7 sentence 1 GewStG to “profit from business operations”, whereby the determination of trade income is linked to the determination of corporate income tax profit. In order to ensure the synchronization of both legal systems, there is therefore no room for a specific trade tax deduction of foreign withholding taxes in accordance with Section 34c (2) EStG. For the case in dispute, this means that the foreign withholding taxes that were added when determining the income of Y-AG must also be included in the trade income of the tax group for trade tax purposes.
Section 34c (2) EStG also expressly stipulates that the application-related deduction of a foreign tax only takes place if the foreign tax is attributable to foreign income that is not tax-exempt (not even pursuant to Section 8b KStG). In the opinion of the BFH, this and the other statutory provisions relevant to the dispute do not constitute a breach of EU law.
In the case in dispute, there had been a consolidated tax group for income tax purposes between X‑AG as the controlling company and Y-AG as the controlled company since 2006. In the year 2007, Y‑AG held shares of less than 10 % in various domestic and foreign corporations and received corresponding dividends (so-called free float dividends), which were subject to withholding tax in the respective country of residence. The tax office recognized the foreign free float dividends, including the foreign withholding tax due on them, when determining the corporate income taxable income at the level of Y-AG and exempted 95 % of the dividends from corporate income tax at the level of X-AG in accordance with Section 8b KStG. When determining the trade income of X‑AG, the tax office took into account the foreign free float dividends and the withholding taxes due on them in full, as the reduction regulations were not applicable to either domestic or foreign shareholdings (Section 9 No. 2a, 7, 8 of the German Trade Tax Act (Gewerbesteuergesetz, GewStG)) with regard to the so-called trade tax intercompany privilege. Both the Lower Saxony tax court in its decision of March 18, 2020 (case no. 6 K 20/18) and the BFH followed the tax office’s legal opinion.
Taking into account the relevant statutory provisions (Section 15 sentence 1 no. 2 sentence 1 KStG in conjunction with Section 7 sentence 1 GewStG), foreign withholding taxes on (free float) dividends that are 95 % tax-exempt when determining the income of the controlling company in accordance with Section 8b KStG cannot be deducted when determining the trade income of the controlled company. They are therefore included in full in the trade tax assessment basis of the tax group for trade tax purposes. Trade tax additions or deductions in accordance with Sections 8 and 9 GewStG were indisputably not applicable in the present case.
The deduction of foreign withholding taxes pursuant to Section 34c (2) EStG (exclusively) in the determination of trade income as requested by X-AG is already precluded by the reference in Section 7 sentence 1 GewStG to “profit from business operations”, whereby the determination of trade income is linked to the determination of corporate income tax profit. In order to ensure the synchronization of both legal systems, there is therefore no room for a specific trade tax deduction of foreign withholding taxes in accordance with Section 34c (2) EStG. For the case in dispute, this means that the foreign withholding taxes that were added when determining the income of Y-AG must also be included in the trade income of the tax group for trade tax purposes.
Section 34c (2) EStG also expressly stipulates that the application-related deduction of a foreign tax only takes place if the foreign tax is attributable to foreign income that is not tax-exempt (not even pursuant to Section 8b KStG). In the opinion of the BFH, this and the other statutory provisions relevant to the dispute do not constitute a breach of EU law.
Notice:
The current BFH decision is still based on an old legal situation. This is because free float dividends received after February 28, 2013 are taxable due to the new statutory regulation in Section 8b (4) KStG. A credit (Section 32c (1) and (6) EStG) or an application-based deduction (Section 32d (2) EStG) of foreign withholding taxes should therefore be possible for the dividends that are no longer exempt in this respect, even if the BFH does not go into this further in its current decision. Irrespective of this, the Fiscal Court Hessen affirmed the crediting of foreign withholding taxes against German trade tax in its decision of August 26, 2020 (case no. 8 K 1860/16, final). A final (supreme court) clarification of both variants on the current legal situation would be desirable. However, as far as can be seen, no such proceedings are currently pending at the BFH.