17.04.2024Government responds to inquiry on dividend WHT exemption and refund procedures
The German government on 8 April 2024 published a response letter dated 2 April 2024 in regard to an inquiry of the leading opposition parties in the lower house of parliament (Christian Democratic Union and Christian Social Union) on the current status of the dividend withholding tax (WHT) exemption certificate and refund procedures for foreign shareholders. The original inquiry of the opposition parties was filed on 19 March 2024 and included 18 questions to the government in this regard. The responses that were provided by the government on 8 April 2024 reveal a significant backlog and overly long processing periods for applications for dividend WHT exemption certificates and refunds at the federal tax office (Bundeszentralamt fuer Steuern (BZSt)). Submitting formalized inquiries to the government is seen as the main mechanism for minority parties in the lower house to control the government; original inquiries and responses from the government are published as official documents by the lower house.
Backround
Germany applies a domestic 26.375% WHT on dividends. In order to apply a reduced or zero WHT rate either based on a double tax treaty (DTT) or the EU parent-subsidiary directive, a dividend WHT exemption certificate that is issued by the federal tax office must be available at the time the WHT is triggered. If no such exemption certificate is available, the German subsidiary has the obligation to withhold at the domestic 26.375% WHT rate and remit the WHT to the tax authorities. The foreign shareholder then must file a WHT refund application with the federal tax office to apply a reduced or zero WHT rate. For both procedures (exemption certificate and refund), the tax authorities require the submission of extensive information and documentation in order to prove that the conditions of the applicable DTT or EU parent-subsidiary directive are met and that, in addition, the conditions of the anti-treay shopping rule of section 50d (3) of the income tax code (ITC) are met. Once issued, a WHT exemption certificate generally is valid for a three-year period (currently there are discussions to extend this period to five years). The federal tax office introduced an electronic filing procedure in 2023 in order to abolish the need to file paper applications for both WHT exemption certificates and refunds. Based on a provision in the ITC, applications for WHT exemption certificates must be processed by the federal tax office within a three-month period after all required documents are filed.
Inquiry and response letter from the government
Following the introduction of the revised anti-treaty shopping rule in 2021(see GTLN dated 03/24/21), the processing of the applications for WHT exemption certificates and refunds at the federal tax office has significantly slowed down and almost stalled in recent months. Based on a note on the website of the federal tax office, the processing of dividend WHT refunds currently takes over 20 months. The slowdown of the processing has created concerns of taxpayers, advisors, and business organizations.
The original inquiry by the opposition parties and the responses provided by the government provide some useful insight into the size of the backlog at the federal tax office and what affected taxpayers can expect. Some noteworthy questions and answers are:
Question 1 to the government: How many applications for dividend WHT exemption certificates are currently pending?
- Answer provided: There are currently 2,666 applications pending.
Question 2 to the government: How long does the processing of applications for dividend WHT exemption certificates and refunds take on average?
- Answer provided: 480 days for applications for dividend WHT exemption certificates and 615 days for applications for dividend WHT refunds.
Question 4 to the government: How many applications for dividend WHT exemption certificates and refunds are currently pending with the federal tax office?
- Answer provided: There are currently 2,666 applications for dividend WHT exemption certificates pending (see question 1) and 61,341 registered applications for dividend WHT refunds (plus approximately 17,000 to 27,000 paper applications) pending.
Question 5 to the government: How many applications for dividend WHT exemption certificates were filed in the period 2020 to 2023 and how many of such exemption certificates were issued during these years?
- 2020: 3,371 applications filed, 3,400 applications processed (with 265 rejected);
- 2021: 2,962 applications filed, 2,104 applications processed (with 181 rejected);
- 2022: 2,845 applications filed, 2,820 applications processed (with 811 rejected); and
- 2023: 2,301 applications filed, 3,600 applications processed (with 676 rejected).
Question 8 to the government: How many applications for dividend WHT refunds were filed in the period 2020 to 2023 and how many of such refunds were issued during these years?
- 2020: 23,298 applications filed, 19,534 applications processed (with 1,715 rejected);
- 2021: 25,239 applications filed, 18,029 applications processed (with 1,625 rejected);
- 2022: 19,448 applications filed, 13,410 applications processed (with 2,516 rejected); and
- 2023: 35,411 applications filed, 13,818 applications processed (with 2,942 rejected).
Question 9 to the government: How many employees are responsible for processing applications for dividend WHT exemption certificates and refunds?
- Answer provided: There are currently 87 employees responsible for processing these applications.
Additional topics covered in the response letter are related to the personnel situation at the federal tax office and what measures are planned to increase the number of responsible personnel for processing the applications for dividend WHT exemption certificates and refunds.
Observations
The original inquiry by the opposition parties and the responses provided by the government help to explain a well-known issue for foreign shareholders. The processing times for applications for dividend WHT exemption certificates and refunds have increased significantly over the last couple of years and, in many cases, result in significant cash-flow issues for foreign investors. The issue has, in the meantime, reached a level where the absence of government action poses a risk for foreign investors of doing business in Germany. Even though the inquiry and responses relate only to dividend WHT, the same issues exist for royalty WHT, as the processing times for applications for royalty WHT exemption certificates and refunds are comparably long.
The rejection percentage has increased from less than 10% in 2020 and 2021 to more than 20% in 2022 and 2023 for both applications for dividend WHT exemption certificates and applications for dividend WHT refunds and even reached almost 30% for applications for dividend WHT exemption certificates in 2022. Notably, the backlog of applications for dividend WHT exemption certificates appears to have decreased since 2023, but the backlog of applications for WHT refunds is still increasing significantly.
Affected taxpayers should consider filing applications for dividend WHT exemption certificates well in advance of the expiration date of any existing exemption certificates. Applications should be filed in a complete manner that addresses all aspects of the entitlement to a reduced or zero WHT rate based on a DTT or the EU parent-subsidiary directive and supported by all required documents. It should be best-practice to have a dividend WHT exemption certificate on file even if there is no dividend distribution to a foreign shareholder planned at the moment in order to have flexibility and to reduce the WHT risk for deemed dividends that might result from a tax audit in the future.
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