German Supreme Tax Court Clarifies Capital Gains Tax Refund Process

Germany's Federal Fiscal Court (BFH) has provided significant new guidance regarding the refund process for capital gains tax, particularly focusing on processing times and interest claims. In a decision published on August 22, 2024, stemming from a ruling on March 13, 2024, the court addressed the lengthy delays often encountered by foreign entities seeking refunds from the Federal Central Tax Office (BZSt).

The background involves situations where German payers are obligated to withhold tax on cross-border payments. Even if Germany lacks taxing rights under tax treaties or EU law, withholding may still be required if no exemption certificate is available. The sole recourse for the recipient to reclaim this tax is through a protracted refund procedure at the BZSt.

The BFH has now established that a "reasonable processing period" should be granted for refund applications, suggesting this period should not exceed six months from the date of application. This contrasts sharply with current BZSt practices, where processing times can exceed 20 months, with statistical averages reported as high as 615 days.

Furthermore, the BFH affirmed the right to interest on refunds concerning capital gains tax levied in violation of EU law. Interest is now to be awarded after the expiry of the six-month reasonable processing period, particularly in cases of EU law infringements affecting foreign funds or domestic funds subject to withholding tax on German dividends.

This ruling is expected to improve predictability for international businesses operating in Germany, offering a clearer path to reclaiming overpaid taxes and potential compensation for delayed refunds. BDO AG, a firm specializing in tax matters, has analyzed the implications of this landmark decision.