Section 50d paragraph 3 German Income Tax Act (Einkommensteuergesetz – EStG): ECJ now also overturns current version of the law

Following the decision of the ECJ of 20.12.2017 (Case C-504/16 - Deister Holding AG - and C-613/ 16 - Juhler Holding A/S -, see Noerr-News of 22.12.2017, the ECJ now declares by decision of 14.6.2018 in Case RS (C-440/17 as generally expected by the advisors that the German anti-treaty shopping regulation in § 50d paragraph 3 EStG not only in the version until 2011, but also the current - since 2012 valid - version is not compatible with EU freedom.

The decisive argument of the European Court of Justice is once again the accusation of abuse based on lump sums, which excludes any examination of individual cases... Moreover, the ECJ maintains that holding companies on their own cannot be regarded as abusive; additional elements must be added; a management holding company or the existence of special substance requirements is therefore not required.

Reactions of the tax authorities to date and evaluation

In a letter dated 4 April 2018, the BMF had probably already limited the scope of application of § 50d para. 3 EStG 2012 in anticipation of the ECJ's decision (see Noerr-News of 10.04.2018). However, the decree remained limited to the cases within the scope of the freedom of establishment and the Parent-Subsidiary Directive, did not also cover the cases of portfolio participation only (freedom of movement of capital) and did not fully open up the possibilities of proof of lack of abuse of design.

Need for action for foreign shareholders

Following the recent ruling by the ECJ, one thing is clear: a correction by way of an administrative regulation alone is not possible. This can only provide clarity for a large number of cases with regard to the past, so that the Federal Central Tax Office can decide in all open cases and does not have to take the time-consuming route through the courts.

However, since the refund of German withholding taxes is limited in time, it is advisable to file an objection to the refusal of the refund of capital gains tax or to apply for the refund of capital gains tax for the first time.

Possible requirements for a new legal regulation

The legislator is therefore called upon to use the current legislative procedure to create an anti-treaty shopping regulation that meets European legal requirements. Guidelines in this respect can be found on the one hand in the abuse rules recently included in the DTAs and on the other hand in the large number of ECJ rulings on the existence of abuse and its proof:

- a mere link to general criteria is no longer sufficient; rather, individual examination must be provided for in individual cases;

- the operation as a whole must be examined to determine whether there is an artificial tax arrangement, which is not subject to any economic reality, in order to obtain unjustified tax advantages; in this context, aspects such as the organisational, economic or other significant characteristics of the group to which the parent company in question belongs and the structures and strategies of this group must also be taken into account;

- the burden of proof of abuse lies with the tax authorities, a simple and general initial proof of the absence of economic reasons or an indication of tax evasion is not sufficient

- the taxpayer concerned must always be given the possibility of counter-evidence in the sense of the existence of economic and other reasons (in particular if the legislator should work with rule examples in accordance with the law)