German Federal Fiscal Court Rules on Foreign Tax Withholding in Tax Groups

The German Federal Fiscal Court (Bundesfinanzhof, BFH) has clarified the deductibility of foreign tax withholding in consolidated tax groups for trade tax purposes. In a decision dated October 16, 2024 (case no. I R 16/20), the court determined that foreign withholding taxes on dividends are not deductible when calculating the trade tax base for a tax group.

The case involved a tax group where the parent company (X-AG) and a subsidiary (Y-AG) were consolidated for income tax purposes. Y-AG received dividends from foreign corporations, subject to foreign withholding tax. While the dividends were largely exempt from corporate income tax at X-AG level under Section 8b of the German Corporate Income Tax Act (KStG), tax authorities included the full amount of dividends and associated withholding taxes in the trade tax assessment base.

The BFH affirmed the tax authorities' position, stating that German trade tax law (Gewerbesteuergesetz) and corporate income tax law (Körperschaftsteuergesetz) are closely linked. Section 7 of the Trade Tax Act refers to the profit determined for corporate income tax purposes. This linkage, according to the court, does not allow for a separate deduction of foreign withholding taxes within the trade tax calculation, particularly when the underlying dividends are tax-exempt for corporate income tax.

This BFH ruling is based on the legal situation prior to February 28, 2013. For dividends received after this date, different rules apply due to amendments in Section 8b KStG, potentially allowing for credit or deduction of foreign withholding taxes. The court did not comment on the current legal situation, but other courts have affirmed crediting of foreign withholding taxes against German trade tax.