Germany ECJ reclaim dismissed by German Supreme Court

On December 1^st, 2022 the Supreme Court of Germany (Bundesfinanzhof) dismissed the ECJ reclaim submitted by College Pension Plan, a Canadian pension fund. In its decision, the Supreme Court rejected College Pension Plan’s appeal against the rejection of its ECJ reclaim by the German Federal Tax Court in 2021. This decision ends 11 years of litigation. While the ECJ had ruled in November 2019 that German tax law in principle violates the free movement of capital by not refunding German withholding tax to College Pension Plan, referring the case to the Federal Tax Court for a final decision based on the facts and taking into account the ECJ’s ruling, this case is now final and College Pension Plan’s ECJ reclaim is denied.

Case facts and course of the litigation

On 23 December 2011, College Pension Plan, a registered Canadian pension plan that is tax exempt in Canada, submitted requests for refund of German withholding tax withheld and paid on dividend income from its German sourced portfolio equity investments in the period 2007-2010. As the Canadian – German tax treaty allows Germany to tax German sourced portfolio dividends at a rate of 15%, and did not (and does not) provide further relief in the form of a refund provision, the requests were based on the position that the German withholding tax is a restriction of the free movement of capital that is prohibited by article 63 of the EU Treaty.

After an (implicit) rejection of the requests by the German tax administration, College Pension Plan appealed before the Munich Fiscal Court. The Munich Fiscal Court referred to the European Court of Justice (“ECJ”).

The ECJ’s decision

On November 13^th, 2022, the ECJ ruled that the German dividend withholding tax levied from College Pension Plan violates the free movement of capital and constitutes a prohibited restriction thereof when, like German pension funds, College Pension Plan uses the dividend income received for pension liability provisioning (i.e. adds the dividend income to the pension liability reserve) either voluntarily or because it is required to do so under (Canadian) law. The question of pension liability provisioning is one of fact which the ECJ refers back to the referring Court of Munich to answer. A more detailed report in the ECJ ruling can be found by clicking here.

The German Federal Tax Court’s decision in the referral case

On December 6^th, 2021 the Federal Tax Court of Munich rejected College Pension Plan’s ECJ reclaim. In short, the Federal Tax Court argued that College Pension Plan did not create provisions in its financial statements for pension liabilities (or at least not in a manner sufficiently comparable to the way German pension funds create provisions for pension liabilities) and did not specifically designate the dividend income received to these provisions. College Pension Plan’s situation is in the Federal Tax Court´s view not objectively comparable to the situation of a German pension fund, justifying a different treatment in the form of a non-refundable withholding tax.

The German Supreme Court’s decision on College Pension Plan’s appeal against the Federal Tax Court decision

College Pension Plan appealed this decision before the German Supreme Court. The Supreme Court has dismissed College Pension Plan’s appeal and upheld the Federal Tax Court’s decision by arguing that with its decision, the German Federal Tax Court had not deviated from the ECJ’s 13 November 2019 ruling. The Supreme Court refrained from dealing with the interpretation of the ECJ ruling, as the ECJ decision gives (in the Supreme Court’ss view) a clear guideline that does not leave room for interpretation. Furthermore, the Supreme Court was of the opinion that the Federal Tax Court strictly adhered to the ECJ guidelines. Finally, the Supreme Court argued that based on the ECJ decision only the Canadian accounting principles should be decisive and as these accounting principles are deemed facts, the court can generally not overrule the interpretation of facts by the Federal Tax Court.

Our views on this decision

This decision is obviously disappointing for the many foreign pension funds who have filed ECJ reclaims in Germany for many years. It is particularly disappointing considering that the ECJ had ruled in College Pension Plan’s favor in 2019. This decision from the German court continues to raise the question whether the ECJ ruling leaves room for such a detailed comparison of foreign pension funds with German pension funds as applied by the German courts. There is ECJ case law which suggests that the answer is “no”. It will be interesting to see what next steps may be.

A copy of the decision from the Supreme Court can be found by clicking here.