European Commission requests Germany to align its withholding tax on foreign charities in with EU law.

The European Commission announced in its april 2022 infringement package that it decided to send a letter of formal notice to Germany requesting it to amend its legislation regarding withholding tax on dividends and interest paid to foreign charities.

Under German tax law, dividends and interest paid to charities having their legal seat or the place of management in Germany are either exempt from withholding tax, or withholding tax is fully refunded. However, dividends and interest paid to comparable charities established in other EU and EEA Member States and third countries are taxed at a gross rate of 25% unless a relevant Double Tax Agreement provides for a reduced witholding tax rate on dividends and interest.

This difference in tax treatment of foreign charities compared to German charities seems to constitute a restriction on the free movement of capital, as meant in Article 63 Treaty on the Functioning of the European Union (also known as the EU treaty) and Article 40 European Economic Area Agreement. The European Economic Area includes all EU member states and Norway, Iceland and Liechtenstein. Such restrictions are prohibited under article 63 TFEU and article 40 of the EEA Agreement as they make investment in Germany less attractive for foreign charities. And while EU member states are not forced under EU law to recognize foreign institutions' charitable status under foreign law, a foreign charity that satisfies the requirements for charitable status and promotes the same public interests as domestic charities must be granted equally beneficial tax treatment as domestic charities This follows from established case law of the European Court of Justice, such as the Persche case (C-318/078) and the Walter Stauffer case (C-386/04).

If Germany does not provide a satisfactory response within the next two months, the Commission may decide to send a reasoned opinion.