German Court Rules Taxation of Foreign Investment Funds Violates EU Law

Germany's Federal Fiscal Court (BFH) has ruled that the country's previous taxation of dividends paid to foreign investment funds, while exempting domestic funds, violates the EU principle of free movement of capital. The decision mandates the refund of withheld taxes, plus interest, to eligible non-resident funds.

The BFH found that the German Investment Tax Act (InvStG 2004) imposed a withholding tax on dividends received by foreign funds between 2008 and 2013. This contrasted with domestic funds which were exempt from this tax during the same period. The court based its decision on jurisprudence from the Court of Justice of the European Union (CJEU).

The case involved a French investment fund seeking a refund of taxes paid on German-source dividends. The fund argued that the unequal treatment under German law was discriminatory and contrary to EU regulations governing the free movement of capital. Tax authorities had initially denied the refund, citing the need to maintain the coherence of the German tax system.

However, the BFH concluded that the disparity in treatment was not justified. Citing the CJEU, the court stated that foreign funds must receive the same tax treatment as domestic funds. The ruling also entitles the fund to an annual interest of 6% on the refunded amount.