In a landmark decision on 21 August 2024, the German Federal Fiscal Court (Bundesfinanzhof) ruled on the KPMG test cases (IR 01/20, IR 02/20), involving foreign investment funds seeking refunds of dividend withholding tax for years prior to 2018. The cases involved a Luxembourg Sicav and a French FCP fund, which were represented by KPMG. The ruling has significant implications for foreign investment funds that were subject to German withholding tax, as the court’s decision confirmed their entitlement to refunds under certain conditions, KPMG in a press release on 22 August.

Free movement of capital

The fiscal court ruled that the foreign investment funds were entitled to a refund of the withholding tax based on the free movement of capital under article 63 of the Treaty on the Functioning of the European Union (TFEU). The court found that German legislation was discriminatory in its treatment of foreign funds compared to domestic ones. Specifically, section 11 of the German investment tax act (InvStG) exempts German funds from tax on dividend income for the years 2004 to 2017, while foreign funds were required to pay at least 15% withholding tax on dividends from German sources.

The court rejected the justification previously upheld by the tax court in Hesse, which had argued that the coherence of tax law justified the discriminatory treatment, as it considered the taxation of investors in the funds. However, the Federal Fiscal Court concluded that since section 11 InvStG does not make the tax exemption for German funds dependent on the subsequent taxation of investors, the legislation could not be justified on these grounds.

Limitation period and late interest

The court also agreed that the general German limitation period of four years applies to claims for refunds. This period begins at the end of the year in which the dividend was received or the withholding tax was paid. The ruling clarified that foreign investment funds could claim refunds within this timeframe.

Additionally, the fiscal court ruled that late interest is generally payable on the refund amounts. Under German law, the refund amounts are subject to late interest of 0.5% per month from the date the claim arises under EU law, in accordance with national German regulations, KPMG noted. For refund years prior to 2012, the interest period begins six months after the refund application was submitted. For years from 2012 onwards, the period starts when the withholding tax was levied upon receipt of the dividend.

The fiscal court did not address whether the interest rate should be adjusted for periods from 2019 onwards, as statutory changes might reduce the rate to 0.015% per month. However, KPMG suggested that there are strong arguments for maintaining the 0.5% interest rate beyond 2019.

Further proceedings

The federal fiscal court overturned the previous judgement by the Hessian tax court and referred the cases back to the lower court for further examination. The Hessian tax court must now verify whether the claimants were effectively subject to withholding tax, including reviewing proof of withholding tax and dividend vouchers, as well as confirming the beneficial ownership of the funds on the dividend ex-date. Additionally, the court is tasked with calculating the refund interest based on the fiscal court’s decisions.

This review and calculation process is expected to take between six and twelve months, after which the proceedings should be concluded. The Federal Tax Office (BZSt) is likely to process refund applications on a larger scale only after the Hessian tax court completes its review, KPMG stated. The BZSt will then require relevant evidence to fully clarify the conditions for a refund.

Implications and recommendations

The fiscal court’s judgement has significant implications for foreign investment funds seeking refunds of German withholding tax. According to KPMG, to navigate the process successfully, funds must ensure they meet all necessary conditions and provide adequate documentation. This includes proving that the fund was subject to German withholding tax, is the beneficial owner of the dividends and has not engaged in securities lending or similar transactions. Additionally, claimants should verify that their claims have been filed within the four-year limitation period and ensure that they request late interest payments as part of their refund claims, said KPMG.