Full exemption from withholding tax on distributions following the commencement of liquidation?

Tax liability on distributions made by domestic companies to their foreign shareholders

Where domestic corporations distribute profits to foreign shareholders, the latter are subject to limited tax liability in Germany if the domestic corporation has its registered office or place of management in Germany (Section 49(1)(5)(a) of the Income Tax Act (EStG)). In these so-called ‘inbound cases’, the tax is levied by way of withholding tax (25 per cent capital gains tax plus 5.5 per cent solidarity surcharge) and generally has a finalising effect. The foreign corporation is not always assessed for tax in Germany.

(Full) reduction of withholding tax possible

Foreign companies may be eligible for relief from withholding tax under Section 44a of the German Income Tax Act (EStG) to a rate of 15 per cent plus the solidarity surcharge, or under a double taxation agreement with the relevant country. Under the double taxation agreements concluded by Germany, the withholding tax is generally reduced to 5 per cent, 10 per cent or 15 per cent. It should be noted that the solidarity surcharge is already taken into account here.

Within the European Union, under Section 43b of the German Income Tax Act (EStG) – which implements the Parent-Subsidiary Directive in Germany – a full exemption from withholding tax on profit distributions within the meaning of Section 20(1)(1) EStG is possible provided the conditions are met.

However, under paragraph 1, sentence 4 of this provision, there is an exception to the withholding tax relief for distributions that ‘are received on the occasion of the liquidation or conversion of a subsidiary’. The interpretation of the provision regarding the wording “received on the occasion of the liquidation or conversion of a subsidiary” and its application to distributions of retained profits – i.e. profits which, although arising before the commencement of liquidation proceedings and resulting from the active phase of the dissolved company, are only distributed thereafter – has been a matter of dispute to date.

The dispute

In the case in question (Federal Fiscal Court (BFH), judgement of 3 March 2026 – VIII R 8/24, published on 15 May 2026), a Luxembourg Société Anonyme (S.A.) was the sole shareholder of a German GmbH, which was dissolved on 31 December 2010 and subsequently entered into liquidation. Following the commencement of liquidation, the GmbH resolved in November 2013 to distribute profits to its Luxembourg parent company. The distribution related exclusively to profits of the GmbH that had been generated prior to the commencement of liquidation. The parent company applied to the Federal Central Tax Office (BZSt) for full relief and a refund of the withheld capital gains tax plus the solidarity surcharge. The BZSt rejected the application on the grounds that the distributed profits constituted capital gains within the meaning of Section 20(1)(2) of the Income Tax Act (EStG). Even if the profits were capital gains within the meaning of Section 20(1)(1), Section 43b(1), fourth sentence, of the Income Tax Act (EStG) precludes full relief, as the capital gains arose in connection with the liquidation of the subsidiary.

Having already ruled in favour of the Luxembourg-based parent company bringing the action, the Federal Fiscal Court (BFH) also confirmed, in the present case, the entitlement to full exemption and reimbursement of the withholding tax withheld pursuant to Section 43b of the German Income Tax Act (EStG).

The Federal Fiscal Court interprets Section 43b of the Income Tax Act (EStG) in accordance with the directive…

Firstly, in its judgement, the Federal Fiscal Court (BFH) clarified that the distribution of profits from the period prior to the company’s dissolution, which are only resolved and paid out after the dissolution date, are to be classified as investment income under section 20(1)(1) of the Income Tax Act (EStG) and must therefore be distinguished from liquidation payments under section 20(1)(2) of the EStG. Consequently, in such cases, the scope of application of Section 43b(1), first sentence, of the German Income Tax Act (EStG) would, in principle, be applicable. The confirmation of full exemption from withholding tax subsequently arose on the basis of an interpretation of Section 43b(1), fourth sentence, of the EStG by the BFH that was in line with the relevant directives.

… and concurs with the taxpayer’s view

In this context, the Federal Fiscal Court (BFH) clarified that Section 43b of the Income Tax Act (EStG) constitutes the national implementation of Article 5 of the MTR and that, consequently, the reverse exception in Section 43b(1), fourth sentence, of the EStG must be assessed in the light of that Article. Since Article 5 of the MTR – which is based on the state of residence of the subsidiary (source state) and requires exemption from withholding tax – unlike Article 4 of the MTR – which is directed at the state of residence of the parent company and has been transposed nationally into Section 8b of the Corporation Tax Act (KStG) – does not contain a reverse exception for profit distributions ‘on the occasion of liquidation’, the BFH concluded that the distribution of profits from the dissolved company’s period of operation cannot, therefore, be subject to any restriction either. As this interpretation is, in the BFH’s view, self-evident, it refrained from referring the matter to the European Court of Justice.

In addition to the interpretation in line with the Directive, the BFH also confirmed the outcome by referring to the spirit and purpose of the MTR, as well as to the taxation system under Section 11(4), third sentence, of the Income Tax Act (EStG), which applies in purely domestic liquidation cases.

Conclusion and practical advice

According to the Federal Fiscal Court’s (BFH) ruling, the status or commencement of the liquidation of a German subsidiary no longer necessarily results in the denial of full withholding tax exemption for the EU parent company under section 43b(1), first sentence, of the German Income Tax Act (EStG). The restriction imposed by the BFH on the scope of section 43b(1), fourth sentence, of the German Income Tax Act (EStG) is to be regarded as positive from the taxpayer’s perspective. In order to be able to claim the full reduction of the withholding tax rate to 0% in such cases, a careful distinction must in future be made, on the basis of meaningful documentation, between the date on which profits arose – i.e. between historical profits from the period prior to the commencement of liquidation proceedings and profits arising after the commencement of liquidation proceedings (liquidation profits). For the former, full exemption from withholding tax is possible subject to the further conditions set out in Section 43b of the Income Tax Act (EStG). It should be noted that all exemptions from withholding tax (both under Section 44a(9) of the German Income Tax Act (EStG), under the relevant double taxation agreements, and under Section 43b EStG) are granted exclusively subject to the conditions of the so-called ‘anti-treaty shopping’ rule in Section 50d(3) EStG.

If, in the past, a withholding tax exemption was rejected by the Federal Central Tax Office (BZSt) on the basis of the exception in Section 43b(1), fourth sentence, of the German Income Tax Act (EStG), it should be checked whether the assessment has already become final and whether claims for a refund can still be made.