Updates
Date:
This article was written by
Certified Tax Advisor, Lawyer, Director, National Office Tax & Legal
Consultant, National Office Tax & Legal
On application, the withholding tax on capital income (KESt) on capital gains such as dividends paid by a domestic subsidiary to its EU parent is not levied if the latter can demonstrate that, at the time the tax arises, it has been continuously directly holding at least 10% of the subsidiary’s share capital for 12 months. Exceptionally, the tax relief does not apply where the capital income arises on the occasion of the liquidation or transformation of the subsidiary. The German Federal Fiscal Court (BFH) decided on March 3, 2026 (case no. VIII R 8/24) in a case concerning profits that had been generated before the start of the subsidiary’s liquidation but were distributed to its EU parent only afterwards.
A Luxembourg Société Anonyme (S.A.) was the sole shareholder of a German GmbH, which was dissolved on December 31, 2010 and subsequently entered liquidation. After the start of the liquidation, the GmbH resolved and effected a distribution of profits from its active period before dissolution (so-called pre-liquidation profits) to the S.A. The German Federal Central Tax Office (BZSt) refused the S.A.’s application for full exemption and refund of the withheld KESt, citing the above-mentioned exception, and granted only a partial KESt reduction to 10%. The BFH finally disagreed.
First, the BFH clarified that the distribution of such (undisputed in the case) pre-liquidation profits by a subsidiary, which is resolved and effected only after the dissolution date, falls under No. 1 of Section 20 (1) of the German Income Tax Act (EStG) (dividends) as required by Section 43b (1) sentence 1 EStG, and not under its No. 2 (remuneration arising after the dissolution of a corporation).
This opens the scope of application of the relief provision in Section 43b (1) sentence 1 EStG. Since its further requirements (in particular the period and amount of participation, see above) were also met by the parent in the case, it is entitled – irrespective of the provisions of the Germany–Luxembourg tax treaty of 1958 regarding the amount of permissible withholding – to full exemption and refund of the capital income tax withheld and paid on the distribution, together with the solidarity surcharge.
The exception in Section 43b (1) sentence 4 EStG – that relief does not apply to capital income arising on the occasion of the liquidation of a subsidiary – does not apply in the case. “On the occasion of the liquidation” is not to be equated with the situation that the domestic subsidiary, after the start of liquidation, distributes to its EU parent profits that arose earlier. This follows from a directive-compliant interpretation of Section 43b EStG to avoid a breach of the relevant EU law provision of Article 5 of the Parent-Subsidiary Directive (MTR). That provision, also because of the broad concept of profit distribution already applied by the CJEU, obviously applies to the distribution of profits from the active period of a dissolved company. Article 5 MTR focuses on the residence state of the subsidiary and requires, to safeguard tax neutrality, full exemption from withholding at source there. It contains neither – unlike Article 4 MTR – a rule excluding distributions on the occasion of liquidation, nor can such an exclusion be read into it or applied by analogy.
Finally, the national taxation system in liquidation cases (Section 11 of the Corporation Tax Act) also classifies a profit generated before winding-up but distributed only during the winding-up period systematically as attributable to prior years, not to the winding-up phase.
Notes:
The supreme-court clarification of the distinction between distributions of pre-liquidation and liquidation profits with regard to possible KESt relief is a positive signal for cross-border group structures in inbound cases. The economic origin of the profits must be documented clearly. In the electronic application form of the BZSt online portal (BOP), the resolution on profit appropriation and the balance sheet for the previous year must mandatorily be submitted, specifying the expected date of receipt of the profits. The BZSt grants KESt relief – taking into account the so-called anti-treaty-shopping rule of Section 50d (3) EStG – only if it is proven that the distribution derives from the free retained earnings formed before the company’s dissolution. By contrast, payments from the realization of company assets during the liquidation phase are for tax purposes treated as repayments of nominal capital or contributions. Such genuine liquidation proceeds are taxable on a limited basis in the EU parent company.