1. Case Introduction
GmbH is a limited liability company established in Germany. During the liquidation process, it distributed dividends to its Luxembourg parent company. The dividend distribution occurred after the German company officially decided to liquidate but before the company’s commercial registration was cancelled. The dividends distributed came from the operating profits generated by the German company before the liquidation procedure was initiated.
GmbH claimed that the above dividend distribution could be subject to the zero withholding tax rate policy in accordance with the relevant provisions of the EU Parent-Subsidiary Directive. The local tax bureau believed that dividends distributed during the liquidation period could not enjoy the zero tax rate treatment of the EU Parent-Subsidiary Directive, and should be subject to withholding tax at a rate of 10% in accordance with the Germany-Luxembourg Double Taxation Agreement. The Cologne Regional Tax Court supported GmbH’s claim and made a ruling in favor of the taxpayer.
2. Focus of the Dispute
The local tax bureau stated that according to Article 4(1) of the EU Parent-Subsidiary Directive and Article 43b(1) of the German Income Tax Act (ITC), dividend distributions made “at the time of liquidation” are not subject to the zero dividend withholding tax policy stipulated in the directive. The tax bureau emphasized that the “at the time of liquidation” referred to in the above decree should be calculated from the time when the company makes a liquidation resolution. Dividend distributions made during this period are related to liquidation and do not fall within the scope of the zero dividend withholding tax preferential policy stipulated in the EU Parent-Subsidiary Directive.
GmbH believes that the dividend distribution “upon liquidation of the company” referred to in Article 4(1) of the EU Parent-Subsidiary Directive and Article 43b(1) of the German Income Tax Act (ITC) should be understood as distribution directly related to the liquidation process, and profit distribution generated before the liquidation period of the enterprise and not directly related to the liquidation can enjoy the zero withholding tax rate.
3. Final Decision
In October 2022, the Cologne Regional Tax Court ruled on the case and did not support the local tax bureau’s claims. The court held that the dividend distribution “at the time of company liquidation” mentioned in Article 4(1) of the EU Parent-Subsidiary Directive and Article 43b(1) of the German Income Tax Act (ITC) should be interpreted in a narrow sense, that is, distribution directly related to the liquidation process. The dividend distribution of GmbH is derived from the profits generated before the liquidation and is not directly related to the liquidation activities. Even if the distribution resolution and dividend payment are completed during the liquidation period, it can still enjoy the zero withholding tax rate.
However, the court made a different ruling on the second dividend paid by the German company to its parent company at the end of the liquidation period. The court held that the company clearly stated in the shareholders’ resolution that the second dividend payment was the last “action” of the company’s liquidation. From the wording of the resolution, it can be seen that the dividend distribution is directly related to the liquidation process and is a dividend distribution “in the liquidation of the company” as referred to in Article 4(1) of the EU Parent-Subsidiary Directive and Article 43b(1) of the German Income Tax Act (ITC). Even if this distribution is also derived from profits generated before the liquidation, it cannot enjoy the zero withholding tax rate.
4. Implications for “Going Global” Enterprises
First, make good use of tax incentives. When enterprises go abroad to invest and operate, they should fully understand the tax policies of their own country, the host country and the region where the host country is located, as well as the tax agreements that have been signed and come into effect, and make full use of various tax incentives to minimize tax costs, increase investment returns, and safeguard their own rights and interests.
Second, make good legal plans. For example, in this case, the EU Parent-Subsidiary Directive stipulates that the dividend withholding tax is subject to a zero tax rate, but at the same time stipulates that dividend distribution “when the company is liquidated” is not subject to the above preferential restrictions. When drafting shareholder resolutions involving dividend distribution, companies should pay attention to whether the distribution time will affect the enjoyment of tax incentives, clarify the time of dividends, pay attention to wording and expression, take precautions in advance, ensure that it complies with legal requirements, and reduce tax disputes.
The third is to make good use of legal remedies. When a dispute arises with the host country’s tax authorities, the enterprise should actively sort out the legal basis, preserve key evidence, and seek judicial remedies in a timely manner. In this case, the local tax court made a ruling in favor of the enterprise, providing effective support for the enterprise to safeguard its own interests in tax-related disputes, and demonstrating the important role of judicial remedies in protecting the rights and interests of enterprises.
