German Tax Court Orders Interest Payment on Incorrectly Withheld Capital Gains Tax

Germany's Federal Fiscal Court (BFH) has issued a significant ruling (Case VIII R 32/21) concerning interest on incorrectly withheld capital gains tax to be refunded to foreign corporate shareholders. The court determined that interest must be paid for the undue delay of tax refunds if such delays stem from a misapplication of national regulations that contravenes EU law.

In the case, a German company had withheld and remitted capital gains tax and solidarity surcharge on dividends to its Austrian parent company. Although a certificate of exemption was initially granted, it was later revoked, citing a presumption of abuse. The Federal Central Tax Office (BZSt) initially denied the refund, but was compelled to issue it in December 2017 following rulings by the European Court of Justice (ECJ) that found Germany's anti-abuse provision to be incompatible with EU law.

The BFH reasoned that even if national law does not explicitly provide for interest, it must be granted analogously based on EU law. It is sufficient that the tax withholding and the delay in its refund were based on an erroneous interpretation or application of national rules contrary to EU law.

The court also clarified the commencement date for interest accrual. If tax is not refunded within three months of a properly filed refund application due to an EU-law-violating procedure, interest accrues from the end of this three-month period. However, if an exemption certificate was wrongfully revoked, interest begins to accrue from the day the tax was withheld. The court further confirmed that interest is calculated on a daily basis at an annual rate of 6% (for periods ending before January 1, 2019).

This decision could lead to interest claims in numerous scenarios where German tax authorities relied on the previous, EU-law-incompatible presumption of abuse. While the ruling's direct applicability to other cases may be limited, it opens the possibility for similar claims in analogous situations involving incorrectly withheld capital gains tax.