Permanent overpayment certificate for holding corporations

Capital gains tax liability for dividends

If profit shares are distributed by a domestic corporation to its shareholders, the distributing company must withhold capital gains tax (KapESt) - plus solidarity surcharge (SolZ). Capital gains tax is withheld on behalf of the creditor of the investment income, who can offset the tax withheld against his subsequent income or corporation tax assessment.

If the creditor of the investment income is a corporation that holds at least 10% of the share capital or nominal capital, the investment income is fully exempt from corporation tax except for a deduction of 5% (Section 8b KStG). The remaining 5% of the dividend is effectively taxed at 1.5% (plus solidarity surcharge).

Holding corporations as permanent overpayers

Holding corporations that hold a stake of more than 10% in other corporations and generate their income exclusively from dividend distributions are sometimes exposed to liquidity disadvantages. The 25% capital gains tax withheld at the time of distribution is offset by a deferred income tax of only 1.5% as part of the corporation tax assessment. As a result, corporations that do not generate any other income apart from dividend distributions have too much capital gains tax at their disposal during the year, which is only offset and paid out at the time of the tax assessment (so-called permanent overpayers).

Against this background, such corporations have the option of applying to the relevant tax office for a so-called permanent overpayer certificate in order to exempt the distributing subsidiary corporation from the obligation to withhold capital gains tax (Section 44a (5) EStG).

Federal Fiscal Court specifies requirements for permanent overpayers

The Federal Fiscal Court (BFH) recently had to deal with the question of whether holding corporations whose income consists exclusively of tax-exempt investment income are permanently overpayers due to the ‘nature of the business’.

In the judgement case, the tax office had refused to issue a so-called overpayment certificate for a holding corporation on the grounds that, according to the articles of association, the company could have operated beyond its function as a holding company. The overpayment situation due to the ‘type of business’ was therefore not permanent.

The BFH explained that, in the case of holding corporations, the only relevant factor is the business activity actually carried out. A broadly formulated corporate purpose according to the articles of association is therefore irrelevant if the company does not actually make use of this option on a permanent basis.

The BFH states that the decisive factor is rather whether the company would actually be able to take up the permitted further activity (at any time) due to its (current) structure. Only then would the overpayment situation no longer be based on the ‘type of business’ and this would justify a rejection of the application.

As the holding corporation in the case decided did not have any staff of its own and could not have been operationally active itself beyond its holding function, the BFH considered the characteristic of the overpayment situation to be permanently given due to the ‘nature of the business’ (here: holding function).

This conclusion was not altered by the fact that the holding corporation purchased consultancy services externally and passed them on to the distributing subsidiary corporation largely to cover costs, as the holding corporation was not equipped to offer these services on the market at a profit due to a lack of its own staff. The reason for the overpayment situation was therefore due to the ‘nature of the business’ as a holding company.

Conclusions for consulting practice

The judgement of the BFH with its reasons for the decision is very welcome and somewhat expands the previously restrictive handling of the characteristic of the ‘type of business’. Even if the issue of a permanent overpayment certificate does not lead to a reduction in the tax burden, it can sometimes generate a considerable liquidity advantage.

Federal Fiscal Court, judgement from 12.12.2023 - VIII R 31/21