Post by Thore Holtrichter

The European Commission has opened infringement proceedings against #Germany, #France and #Italy by sending letters of formal notice. The proceedings concern national rules on the taxation of dividends received from subsidiaries in other EU Member States and their compatibility with the Parent-Subsidiary Directive. For Germany, I agree with Dr. Tibor Schober, that it is likely to concern Sec. 8b para. 5 of the German Corporate Income Tax Act, under which 5% of otherwise tax-exempt dividend income is treated as non-deductible business expenses and is therefore effectively subject to corporate income tax. The interesting point is the potential “cascade effect”: where dividends are distributed through several corporate layers, the 5% add-back may arise at each level. This can result in multiple layers of taxation on the same underlying profits, even though the Parent-Subsidiary Directive is intended to eliminate double taxation of profit distributions within EU corporate groups. Article 4(3) of Directive 2011/96/EU allows Member States to deny deduction of costs relating to the participation in the subsidiary and, where such costs are fixed as a flat-rate amount, caps that amount at 5% of the profits distributed by the subsidiary. The key question now appears to be whether applying this 5% add-back repeatedly at successive levels in a group goes beyond what the Directive permits. That question is highly relevant for multi-tier holding structures and may become an important point for German (French and Italian?) corporate tax planning and controversy.