On 4 April 2018, the BFH issued a practice-relevant Judgement (BFH of 29.11.2017, I R 58/15) on the tax treatment of inbound investments by non-residents with limited tax liability in domestic equity investments.
In the case at hand, the shares in a domestic GmbH, which distributed profits, were held via a domestic limited partnership (KG). The KG was not originally engaged in commercial activities, but only in asset management. However, it was "characterised" commercially in accordance with Section 15 (3) No. 2 EStG, as its general partner (a GmbH) had sole management authority. The limited partners of the KG were foreign (Chilean) corporations.
The BFH has now ruled that, within the framework of limited tax liability, a limited partnership with a purely commercial character is not completely transparent, but can very well provide its foreign shareholders with a domestic permanent establishment (Section 49 (1) no. 2 (a) EStG in conjunction with Section 2 no. 1 KStG).
As a result, the foreign shareholders of the KG must submit a tax return for their share of the profits (including the dividends from the GmbH contained therein) and their tax liability is determined as part of the tax assessment. The deduction of capital gains tax when the KG receives the (domestic) dividends from the GmbH therefore does not have a final withholding effect (section 32 (1) no. 2 KStG). The capital gains tax levied is to be credited against the resulting corporation tax in the course of the assessment and, if applicable, also refunded. However, it must be examined (the facts of the case were not yet ready for a decision in this respect) whether the GmbH shares are also to be allocated to a foreign permanent establishment of the foreign KG shareholders in accordance with the so-called principle of causation.
The judgement is for the Structuring of inbound investments in German equity investments is of great importance. In many cases, German withholding tax (26.375%) on dividends becomes definitive when domestic dividend income is received by non-residents. Foreign shareholders often do not benefit from withholding tax reduction options under the EU Parent/Subsidiary Directive (Section 43b EStG) or under applicable double taxation agreements (DTAs). This is often due to the fact that the necessary substance requirements (Section 50d (3) EStG) cannot be met.
Such a definitive capital gains tax on domestic dividends is hardly acceptable, particularly for foreign corporations with >10% shareholdings, as these investors can generally receive domestic dividend income tax-free at 95% (Section 8b (1), (4), (5) KStG). However, the prerequisite for this is that the dividend income is recognised as part of the tax assessment for foreign corporations with limited tax liability. The BFH judgement now opens up the possibility of more easily obtaining such a tax assessment via domestic acquisition vehicles in the form of commercial holding corporations.
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