German withholding tax is contrary to Parent Subsidiary Directive


German withholding tax is contrary to Parent Subsidiary Directive

Germany applies a general abuse presumption that is limited to cross-border situations. According to the Court of Justice of the European Union this is not permitted under the Parent Subsidiary Directive.

16 january 2018

On 20 December 2017, the Court of Justice of the European Union (CJEU) ruled that Germany was not permitted to refuse the withholding tax exemption on dividend distributions for the reason that if an underlying shareholder held a direct interest it would not qualify for the exemption either. The highest European court considers this to be an infringement on the Parent Subsidiary Directive and the freedom of establishment.

Facts and circumstances

Two comparable issues involved a holding company in another EU Member State holding the shares in a German company, in part or in full. In turn, an individual held the shares in this holding company.

The German company paid a dividend to the EU holding company. Germany levied a withholding tax because had the individual held the shareholding in the German company directly, the individual would have been treated less favourable than in the situation where a holding company was placed in between. The CJEU was presented with the question whether levying withholding tax on the dividend distributions infringed on EU law.


Basically, the Parent Subsidiary Directive applies to this dividend distribution. As a result, Germany should have applied a withholding tax exemption. Germany nevertheless refused to do so, invoking a presumption of proof of fraud or abuse included in its legislation. According to this general presumption the EU holding company was disregarded. As the underlying shareholder had not been able to invoke the withholding tax exemption, it was likewise denied to the holding company.

If fraud or abuse is involved the Parent Subsidiary Directive permits the benefits of the directive to be refused. According to the Court of Justice, though, this is not allowed if, like in the question at hand, this is based on a general presumption of abuse without the tax authorities needing to provide initial proof of a lack of economic reasons or presumptions of fraud and abuse. What’s more, the taxpayer had no possibility to provide evidence to the contrary. The CJEU adds to this that the parent company managing its subsidiary’s assets or the income of that company resulting only from such management cannot per se indicate the existence of a wholly artificial arrangement. This is why Germany must as yet apply the withholding tax exemption to the dividend distribution, as provided for in the Parent Subsidiary Directive.

Source: Court of Justice of the EU of 20 December 2017, C-504/16 (Deister Holding), ECLI:EU:C:2017:1009.

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