Can there be a (further) possibility of refunding withholding tax to foreign pension funds in Germany?

Withholding tax for foreign pension funds in Germany - Submission to the European Court of Justice

In times of low interest rates, withholding taxes can also have a significant impact on the return on investments. Unused exemption and refund possibilities should therefore be considered. Such an opportunity could possibly arise for foreign pension funds (especially EU funds) that receive for example dividends from domestic corporations. The Munich Fiscal Court has presented the following subject matter to the ECJ:

A limited-taxable foreign pension fund is subject to a 15% withholding tax (“WHT”) on the dividends it receives and has no possibility of offsetting or refunding. On the other hand, German pension funds which are subject to unlimited tax liability are credited with the full amount of WHT on their corporation tax liability and, if applicable, refunded. At the same time, the generation of dividend income from German pension funds does not lead to a taxable balance sheet profit due to the simultaneous increase in provisions for pension payment obligations. This unequal treatment raises concerns for the Senate about a possible violation of the freedom of capital movements.

The question is similar to the Commission/Finland case (ECJ of 8 November 2012, C-342/10, EU:C:2012:688). In infringement proceedings against Finland, the ECJ found that foreign pension funds were discriminated in taxation, since under Finnish tax law only domestic pension funds were allowed to deduct actuarial provisions as tax-deductible operating expenses, whereas dividends received by non-resident pension funds were subject to withholding tax which could not be reduced by tax deductions. A pension fund resident in a third country, is only protected by the freedom of capital movements pursuant to Art. 63 (1) and 65 TFEU if the so-called standstill clause in accordance with Art. 64 a TEU is not applied. Pursuant to Article 64 (1)(a) of the TFEU, the freedom of capital movements to third countries can only be restricted on condition that the legislation restricting the free movement of capital already existed on 31 December 1993 and that the provision is also related to direct investments, including investments in real estate, establishment, provision of financial services or admission of securities to the capital markets. For this reason, the Munich Fiscal Court has also submitted to the ECJ the question whether the free movement of capital to third countries in accordance with Article 64 TFEU applies. In this context, it should be noted that the English term “pension fund” is usually used for two German types of occupational pension schemes (i.e. "Pensionskasse" oder "Pensionsfonds"). The submission refers to discrimination in comparison with domestic Pensionsfonds. It is therefore also necessary to determine whether the pension fund is comparable with a Pensionsfonds.

In summary, foreign pension funds should analyse their portfolios for possible German withholding tax and continue to observe the developments in this issue.

If you have any questions regarding this topic, please feel free to contact Florian Teichert.