Global Tax Alert | 21 December 2017

CJEU rules German anti-treaty shopping rule infringes Parent-Subsidiary Directive and freedom of establishment

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Executive summary

On 20 December 2017, the Court of Justice of the European Union (CJEU) issued its decision in the combined German cases C-504/16 (Deister Holding AG) and C-613/16 (Juhler Holding A/S). These cases concern the application of the (old version of the) German anti-treaty shopping provision, sec. 50d para 3 German Income Tax Act (ITA). The CJEU ruled that this provision infringed both the European Union (EU) Parent-Subsidiary Directive and the right of freedom of establishment.

Detailed discussion


Under the German anti-treaty shopping rule as applicable until 31 December 2011, a foreign company cannot claim a refund of German withholding tax or apply for an exemption certificate to the extent the company was held by shareholders which would not be entitled to the refund or exemption if they derived the income directly and if: (i) there were no economic or other valid reasons for the interposition of the foreign company, or (ii) the foreign company does not derive more than 10% of its overall gross earnings for the respective fiscal year from its own business activities, or (iii) the foreign company does not participate in general commerce by means of an appropriate business organization.

The case C-504/16 concerned a Dutch-based holding company which, from 2005 onwards, held 26.5% of the capital in the German D-GmbH. The shares in the Dutch holding company were held 100% by a German resident individual. The Dutch company held several other companies established in various countries and financed those companies, inter alia, by making loans to the companies of the group. From March 2007, the Dutch holding company had a rented office in the Netherlands and had two employees there in 2007 and 2008.

D-GmbH paid dividends to its Dutch parent company, on which D-GmbH withheld the statutory German dividend withholding tax. The Dutch parent company applied for a refund of the tax withheld. The tax authority rejected that application based on the application of Sec. 50d para 3 ITA. In its view, the fact that the German resident shareholder of the recipient would in case of a direct shareholding not be entitled to a refund as claimed by the Dutch-based holding (the dividend withholding tax would have been credited at level of a domestic shareholder) and the fact that both the interest received from the intercompany financing and the dividend income were not qualified as income from an “own” business resulted in the application of the anti-treaty shopping rule.

The case C-613/16 concerned a Danish holding company which, from 2003 onwards, held 100% of the capital in the German P-GmbH. The Danish holding company was held by a company incorporated under Cypriot law and its sole shareholder was a natural person resident in Singapore. The Danish holding company held shareholdings in more than 25 subsidiaries, some of which also had their registered office in Denmark. The Danish holding had a property portfolio, exercised financial control within the group so as to optimize the group’s interest costs, was responsible for supervising and monitoring the performance of the individual subsidiaries and had a phone line and an email address. Occasionally, it used the premises, as well as the other facilities and staff, of other companies within the group.

In 2011, the Danish holding company received dividends from P-GmbH. Since those dividends were subjected to withholding tax and the solidarity surcharge, the Danish holding applied for a refund of those taxes. The German tax authority rejected that claim based on the application of the anti-treaty shopping rule.

Both cases were brought before the local tax court of Cologne which referred the cases to the CJEU asking whether these rejections were in accordance with the freedom of establishment and with the Parent-Subsidiary Directive.

CJEU decision

The CJEU held that (the old version of) the German anti-treaty shopping rule undermines the objective pursued by the Parent-Subsidiary Directive to prevent double taxation of dividends and the objective pursued by the freedom of establishment to leave businesses free to choose the appropriate legal form in which to pursue their activities in another EU Member State. According to the CJEU, the legislation “is not specifically designed to exclude from the benefit of a tax advantage wholly artificial arrangements the purpose of which is unduly to obtain that advantage, but covers, in general, any situation where persons who would not have been entitled to such an exemption if they received the dividends directly have holdings in a non-resident parent company.” The CJEU further added that pursuant to the German legislation, there is no possibility for the “non-resident parent company to provide evidence of the existence of economic reasons” so that the legislation “establishes an irrebuttable presumption of fraud or abuse.”

Furthermore, pursuant to the CJEU, “the fact that the economic activity of a non-resident parent company consists in the management of its subsidiaries or that the income of that company results only from such management cannot per se indicate the existence of a wholly artificial arrangement which does not reflect economic reality.” Indeed, the CJEU requires an assessment of the relevant situation on a case-by-case basis, “based on factors including the organizational, economic or other substantial features of the group of companies to which the parent company in question belongs and the structures and strategies of that group.”


The decision rendered by the CJEU sheds light on a Member State’s leeway to design anti-abuse rules in the field of countering treaty or directive shopping schemes. In particular, the fact that asset management of a foreign entity may by itself not constitute an indication of an abusive fact pattern and the fact that valid business reasons for the interposition of a foreign entity need to be assessed from a group’s perspective may also render the current German anti-treaty shopping rule in many cases inapplicable. This should be further clarified in the yet to be awaited decision of the CJEU in the pending case C-440/17, GS.

For additional information with respect to this Alert, please contact the following:

Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
  • Klaus von Brocke
  • Jasmin Kollmann
  • Stefan Mueller
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Eschborn
  • Tim Hackemann

EYG no. 07246-171Gbl