German Ministry of Finance modifies anti-treaty shopping rules in response of ECJ decision
In our blog of February, 2018 we discussed the recent (December 2017) ECJ decision in Deister Holding and Juhler Holding (Joined Cases C-504/16 and C-613/16). In these cases the ECJ had held that the German “look through approach” in case of insufficient substance as clarified in Sec. 50d para. 3 German Income Tax Act (ITA) was not compatible with the EC Parent-Subsidiary Directive (Sec. 1 para. 2 in conjunction with Sec. 5 para. 1) and EC law (Sec. 49 TFEU). These Joint Cases are interesting for most Netherlands groups operating in Germany that have received dividends from Germany. Typically Netherlands holding companies that administer subsidiaries have difficulty substantiating sufficient substance to comply with Sec. 50d para. 3 ITA. Often these foreign holding companies, as in the case of the Deister Holding and Juhler Holding require by nature limited managerial staff to manage their asset management activities.
09 Apr. '18
The Deister Holding and Juhler Holding decisions of the ECJ provided these investment holdings with an opportunity to administer evidence that exclusive management of subsidiaries and income derived solely from that management could not be regarded, of itself, as implying the existence a wholly artificial arrangement that does not reflect economic reality. Contrary to what Sec. 50d para. 3 German ITA provides, on a case-by-case basis an overall assessment of the relevant situation should be conducted. Relevant factors should typically be the organizational, economic or other substantial features of the involved group of companies and strategies of the particular group. Interestingly this reasoning is now supported in a Decree providing guidance on the applicability of Sec. 50d para. 3 German ITA issued on April 4 by the German Ministry of Finance. The Decree stipulates that the previous version of Sec. 50d para. 3 ITA as amended in 2007 will not be applied any longer. The Decree further indicates that Sec. 50d para. 3 ITA as applied as from January 1, 2012 will be applied in a modified way. The guidance (which covers additional items that go beyond the scope of this news item) more or less confirms that asset management does not necessarily has to imply that actual staff is employed.
In our opinion the guidance still leaves significant arguments open for debate. In addition it remains to be questioned whether the amended (or modified) guidance on Sec. 50d para. 3 German ITA leaves sufficient arguments for companies to provide evidence that the mere holding of assets does not de facto imply the existence of a wholly artificial arrangement that does not reflect economic reality (as clarified in Deister Holding and Juhler Holding). We expect an increase of Sec. 50d para 3 ITA decisions in particular observing the increased attention to cross-border transfer pricing disputes in relation to Germany. It should be noted that typically cross-border transfer pricing adjustment (vis-à-vis shareholders) in Germany imply the recognition of deemed dividend distributions, which are likewise taxed in accordance with Sec. 50d para. 3 ITA.
From a conceptual point of view the Deister Holding and Juhler Holding decisions might also influence the recently (January 1, 2018) extended Netherlands substance requirements. To obtain an exemption from dividend withholding tax foreign intermediate holding companies (among other requirements) need to satisfy a number of additional substance requirements: employment costs of at least EUR 100,000 (dependent upon the domestic price level) in relation to its intermediary holding functions should be available, the employees must have the professional knowledge and capacity to be able to properly perform their duties and the holding company should have office space at its disposal (for at least 24 months) from which the intermediary holding functions are being undertaken. Last week the Dutch Lower House of the Dutch Parliament has acknowledged that these (extended) requirements do not take into account the scale and nature of the (worldwide) activities of enterprises. Hence, the Lower House has resolved a motion requesting the government to take into account the scale and nature of activities in applying the extended substance requirements. We question however if these requirements, even after the amendments which need to be made based on the resolution of the Lower House, are compatible with ECJ law.