Overview of the legislative initiative
The AbzStEntModG is intended to modernize the tax withholding and refund procedure for foreign payees, we inform you about the planned changes.
On January 20, 2021, the federal government published a draft of the "Act to Modernize the Relief from Withholding Taxes and the Certification of Capital Gains Tax (Withholding Tax Relief Modernization Act, AbzStEntModG) was published. The Act is essentially intended to modernize and digitalize the taxation procedure for certain payments to foreigners on which withholding tax is withheld in Germany. However, it also contains some proposals for amendments to the Conversion Tax Act and Foreign Tax Act.
Withholding tax - Current situation
The withholding of taxes also relates in particular to capital gains tax on domestic dividends or interest paid to foreign recipients. Irrespective of the fact that in many agreements an exemption or lower taxation is agreed by Germany in these cases, the payer must initially withhold 25% of the remuneration and pay it over to the tax authorities. These cases often occur within corporate groups, but private individuals are also affected.
The foreign payee can apply to the Federal Central Tax Office (BZSt) for a refund in the amount of the excess tax withheld ("relief"). In the application, the residence of the payee must be proven by foreign confirmation. Particularly in the case of corporate payees, further information and evidence may be required, e.g. on the corporate structure and the activity and presence abroad. According to a ruling by the European Court of Justice, the previous regulation, which was intended to prevent the abusive use of lower treaty taxation, violated EU law and was therefore only applicable to companies from EU member states to a limited extent. However, the law has not yet been amended, so that companies domiciled in the EU had to actively draw the attention of the BZSt to this in order for these modifications to be taken into account. The processing of the refund application is therefore extensive, especially for companies, and can take a long time.
The planned law is intended to speed up and improve the discharge procedure and prevent abusive discharge.In addition to the procedures for capital gains tax refunds, this also applies to the procedures for the refund of withholding tax on license payments, remuneration for foreign supervisory board members, athletes, etc. in accordance with Section 50a of the Income Tax Act. The draft contains the following essential elements:
Reduction of existing types of procedures to reduce the workload and to consolidate the procedures at the BZSt: types of procedure, such as the control notification procedure, which is not presented here, are to be eliminated. According to the proposal, procedures for foreign investment funds, for example, should also be conducted at the BZSt.
Digital process: Application and decision by the BZSt for the discharge procedures are to be made via an electronic interface from 2024 and only in exceptional cases on paper.
Transmission ofadditional information on investment income and chains of custody of securities directly to the BZSt: Financial institutions are to report to the BZSt, for example, data on capital gains tax, tax withholding or exemption from tax withholding for both limited and unlimited taxpayers. The data is to be collected at the BZSt and evaluated in a special unit in order to identify tax avoidance schemes.
Increased liability of financial institutions for corresponding data, e.g. if a tax is refunded due to incorrect information in the certificate. This should also apply to intermediary (foreign) financial institutions in a chain of custody.
Restatement of regulations to prevent abuse: The draft law is to take into account the existing case law of the ECJ as well as the EU ATAD directives. The examination is to include a stronger case-by-case consideration; for example, a presumption of abuse is to be rebutted by providing evidence of sufficient non-tax reasons. This will be more stringent, for example, for payment recipients that are investment funds or EU companies with a third-country parent company/owner.
Obligation to register even in case of exemption:Even if the remuneration debtor does not have to withhold withholding tax (e.g. because the recipient can present a valid exemption certificate from the BZSt), the debtor must file a tax return.
The government draft contains further proposed amendments that are not directly related to the reform of the relief procedure for withholding taxes discussed above. We present changes to the transformation tax law in another article (LINK). In addition, the draft also contains amendments to the Foreign Tax Act which relate to transfer pricing and essentially transpose the corresponding provisions of the so-called ATAD Directive of the EU into national law.
The provisions of the draft AbzStEntModG provide in particular for extended notification obligations and liability rules for credit institutions in order to prevent tax losses in the future, e.g. through arrangements such as Cum/Ex or Cum/Fake. However, other debtors of remuneration subject to withholding tax may also be subject to an increased obligation to file tax returns under the draft. The planned digitalization of the procedure is to be welcomed. The abuse regulation, which was currently not compatible with EU law, is to be modernized by the draft law and brought into line with applicable EU law. In particular, the implementation of the corresponding provisions of the EU's ATAD Directive will result in tighter regulations that may have an impact on the refund of withholding taxes for EU holding companies of foreign corporate groups and shareholders.