When a corporation (a private limited liability company or a joint-stock company) distributes part of its profits to its stockholders or a cooperative does so to its members, these payments are referred to as dividends.
Foreign stockholders often find it hard to understand how their dividends will be taxed and which law is to be applied.
In the text below, I will help you to understand the taxation procedure in a clear way and show you what options you have and who you can consult if you are a foreign stockholder in a German corporation.
The taxation procedure can be divided up into three theoretical steps.
We will start of by taking a closer look at the current legal situation in Germany:
1. Applicable law in Germany
With regard to stockholders, German tax law fundamentally differentiates between private persons and corporations. This differentiation also applies to foreign stockholders.
Foreign stockholders are normally fully liable to taxation, however, regardless of whether they are private persons or corporations.
A German corporation is obliged to retain German withholding tax on investment income at a rate of 25.0% plus a 5.5% solidarity surcharge (Solz) and, where applicable, church tax. For listed joint-stock companies, this obligation is processed via the German clearing houses, which is not relevant for our discussion. We are interested in non-listed corporations (generally private limited liability companies) that have to fulfill this obligation themselves.
Professional costs and operating costs relating to the dividend distribution cannot be deducted from the taxes.
2. Checking whether a double taxation agreement applies
The next step involves checking whether a double taxation agreement has been reached between Germany and the country in which the stockholder is resident.
The double taxation agreement defines how tax on investment income is divided up between the country where the corporation is based (in this case Germany) and the country of residence of the dividend recipient (the stockholder). The Germany/US double taxation agreement, for example, allows Germany to retain 5% of the dividends as withholding tax on investment income, with of course a 5.5% solidarity surcharge.
The 5.0% withholding tax plus solidarity surcharge makes up the full German taxation, with additional tax applied by the stockholder’s country of residence.
Given that the German corporation is obliged to retain withholding tax on investment income at a rate of 25%, what happens to the other 20%?
3. The tax payment procedure
If you are entitled to a tax reduction on the basis of a double taxation agreement or for other reasons, there are two ways that this can be settled: the reimbursement procedure or exemption procedure.
One option is for the German corporation to pay the tax to the German finance office in full and to provide the stockholder with a taxation certificate for these taxes that have been withheld and paid. The foreign stockholder then needs to make a reimbursement claim to the German Central Tax Office (BzSt), submitting the original copy of this taxation certificate, to claim back the excess tax that has been paid. This reimbursement claim needs to be issued within four years following the end of the calendar year in which the dividends were paid. This option is normally used when there are a large number of stockholders, as a taxation certificate can only be issued if the tax has actually been paid to the finance office.
You can find the forms for making a reimbursement claim here. You may also need to complete an additional claim, depending on your country of residence.
For corporations with few stockholders or companies that belong to an international group, the exemption procedure is often chosen as the German corporation is then only obliged to retain withholding tax on investment income at a rate of 5% rather than 25%. As the reimbursement process can take up to three months after the claim has been submitted, and sometimes even longer, choosing the exemption procedure gives you a considerable liquidity advantage.
To make an exemption request, you need to have holdings in the distributing company of at least 10%. If the request is successful, exemption is granted for at least one year and no more than three years. The processing period lasts no more than three months after the BzSt receives the request.
The exemption procedure is only an option if the dividends have not yet been distributed.
The exemption request forms are available from the German Central Tax Office (BzSt) website.
The taxation of dividends varies greatly from one case to another and it is based on your place of residence and what type of company you have.
To find out what your options are and how to execute these options, it is best to consult a tax advisor.
We will happily provide you with support in this process.
Author: Heinz Potthast
Heinz Potthast ist Steuerberater und Wirtschaftsprüfer mit einem großen Erfahrungsschatz durch seine langjährige Tätigkeit bei namhaften Gesellschaften wie KPMG und PKF. Er ist das Gesicht, das übergeordnete Kontrollgremium und der Leiter unserer Kanzlei. Er betreut jeden unserer Kunden persönlich. Heinz Potthast is tax consultant in Germany with an huge international network to help companies all over the world.