Dividends as private assets

In a recent judgment handed down on 25 August 2015 (VIII R 3/14), the Federal Finance Court (BFH) once again gave its opinion on the application of the partial income tax method (Teileinkünfteverfahren) to dividends received as an individual’s private assets as an alternative to withholding tax. Whilst the Court recently commented on the time limits for applying for such treatment (see news of 5 October the 2015), in this judgment the focus was on the scope of the work carried out by a shareholder who only has a minimum holding of 1%. The Federal Finance Court rejected the view held by the tax authorities, who only want to make the option available to shareholders who are able to exert a material influence on the company’s management decisions owing to their work for the company.

In the Court’s opinion, the “wording of the law, which is clear and not open to interpretation on this matter” does not place any requirements on the work the shareholder performs for the company, either in qualitative or quantitative terms. When justifying its interpretation of the law, the Court also called to mind the legal purpose of the option, i.e. to prevent over-taxation taking place in connection with withholding tax as a result of the prohibition on deduction of income-related expenses. This is because, by applying for the alternative tax treatment, the financing costs for acquiring shares in the company that otherwise would not be deductible can also be set off.

The Court also casts doubt on the tax authorities’ opinion (most recently in a circular published by the German Ministry of Finance on 9 October 2012) that if the work performed is only of marginal importance, this is not sufficient for the right to opt for the partial income tax method (section 32d subsection 2 no. 3 sent. 1b German Income Tax Act (Einkommensteuergesetz – EStG). It believes that there is nothing in the wording of the law itself to support the tax authorities’ restrictive interpretation. The Court has yet to give a conclusive opinion on this matter, since this situation did not exist in the case being decided on.

Note:

The jubilance caused by this decision by the Federal Finance Court may be short-lived, since in the past the upper house of the German parliament, the Bundesrat, has asked for the law on cases of this kind to be amended. This would mean that the application of the partial income tax method to minimum holdings of 1 per cent would be made dependent on whether the shareholder has a “material entrepreneurial influence” on the company’s business activities as a result of their work. However, up to now it has not been possible to implement this request in a legislative procedure.

This judgment may now give new impetus to the Bundesrat’s proposal.