US withholding tax creditable against German trade tax, court rules
A German tax court has ruled that the Germany-US tax treaty requires US withholding tax on dividends to be credited against German trade tax.
The Berlin-Brandenburg Fiscal Court has ruled that the Germany-US tax treaty mandates the crediting of US withholding tax on dividends against Germany's trade tax (Gewerbesteuer). This decision addresses a scenario where dividends are exempt from German corporation tax but remain subject to trade tax, creating a potential for double taxation.
The case involved a German limited liability company (GmbH) receiving dividends from a US corporation. While the dividends qualified for a participation exemption from German corporation tax, they were subject to trade tax due to a lack of equivalent provisions in the trade tax law. The US levied a 5% withholding tax on the dividends, which the GmbH sought to credit against its trade tax liability.
The court determined that double taxation existed, as both countries levied comparable taxes on the same income. It reasoned that the tax treaty's objective of preventing double taxation overrides domestic law limitations. Therefore, the US withholding tax should be creditable against the German trade tax, even though the latter is not explicitly mentioned in the treaty's crediting provisions for corporation tax.
This ruling may face scrutiny from higher courts. The Federal Fiscal Court (BFH) has previously held a stricter view on deducting foreign taxes from trade income, suggesting potential challenges to the Berlin-Brandenburg court's interpretation. However, a previous ruling by the Fiscal Court of Hesse supports the principle of crediting foreign withholding taxes against trade tax in similar circumstances.