US Withholding Tax Refundable Against German Trade Tax

The Berlin-Brandenburg Fiscal Court (Finanzgericht, FG) has ruled that US withholding tax on capital gains can be credited against Germany's trade tax (Gewerbesteuer). The ruling, dated January 14, 2026 (10 K 10106/23), concerns a German GmbH that acquired shares in a US company.

In the case, the German GmbH purchased approximately 26% of the shares in a US corporation in November 2020. In December 2020, the US company distributed a dividend, from which the US withheld 5% tax, consistent with the Germany-US double taxation treaty (DBA). While the dividend was tax-exempt for German corporate income tax purposes under Section 8b of the Corporate Income Tax Act (KStG) due to a deemed acquisition at the start of the calendar year, it remained subject to German trade tax.

The German company sought to credit the foreign withholding tax against its trade tax liability, arguing that a double taxation situation existed. The court agreed with the taxpayer, finding that both Germany and the US levied a similar tax on the same taxpayer for the same object and period. The court noted that the DBA's method article for avoiding double taxation refers generally to income tax and does not differentiate between crediting against income tax and trade tax.

The court dismissed concerns that the nature of trade tax as an objective tax or its domestic focus would preclude such a credit. However, the decision's future might be uncertain, as the Federal Fiscal Court (Bundesfinanzhof, BFH) has previously indicated in a ruling (16.10.2024) that foreign withholding taxes cannot be deducted from the trade tax base, though the legal mechanics differ.