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CJEU Holds German Withholding Tax on Dividends Paid to Non-Resident Pension Funds Violates Free Movement of Capital

The Court of Justice of the European Union (CJEU) issued a judgment on 13 November 2019 on whether Germany's final withholding tax on dividends paid to non-resident pension funds violates EU law in relation to the free movement of capital.

The case concerned a Canadian pension fund that received dividends from portfolio investments in German public limited companies during the years 2007 to 2010, which were subject to final withholding tax at a rate of 15% (rate under Canada-Germany tax treaty). The Canadian pension fund applied for a refund of the tax, claiming that the final withholding was discriminatory given that:

  • German pension funds would be allowed to fully deduct tax withheld on dividends against their corporate tax liability and may claim a refund where tax withheld exceeds the corporate tax liability; and
  • Dividends received result in a moderate or no increase in the taxable result for German pension funds since they may deduct provisions for future pension/retirement commitments.

However, the German tax authorities did not accept the pension fund's argument and denied the claim for a refund. This was appealed and made its way through the courts to the CJEU.

In its judgment, the CJEU ruled in favor of the Canadian pension finding that the differing treatment did amount to an unjustified restriction on the free movement of capital. In particular, the CJEU ruled the following:

Articles 63 and 65 TFEU must be interpreted as precluding national rules, under which dividends distributed by a resident company to a resident pension fund, on the one hand, are subject to withholding tax that can be fully deducted from the corporation tax payable by this fund and give rise to a refund, where the withholding tax exceeds the corporation tax payable by the fund and, on the other hand, do not result in an increase in the taxable result of the corporation tax or result only in a moderate increase in the latter due to the ability to deduct from such income the provisions for retirement, while dividends paid to a non-resident pension fund are subject to a withholding tax which constitutes for such a fund a definitive tax, when the non-resident fund shall allocate dividends to the provisioning of the pensions it will have to pay in the future, which the national court has the responsibility to verify.

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