Learn about Germany's landmark court ruling on withholding tax refunds for foreign investment funds and the compliance challenges they face in reclaiming €7.5 billion.
On March 13, 2024, the German Federal Fiscal Court (BundesFinanzhof, BFH) issued significant rulings regarding the discriminatory taxation of foreign investment funds, specifically addressing cases involving a French FCP and a Luxembourg SICAV for fiscal years 2004-2017. The court affirmed their entitlement to withholding tax (WHT) refunds on capital gains tax withheld on dividends during this period. The ruling determined that the German withholding tax on foreign investment funds violated the principles of non-discrimination and equal treatment within the European Union (EU) - particularly Article 63 of the Treaty on the Functioning of the European Union (TFEU), which safeguards the free movement of capital. Consequently, the court ordered the refund of withheld taxes plus interest to the affected funds.
Read more about the BFH’s landmark Capital gains decision here
Initial Refunds and Compliance Challenges
In December 2024, the first foreign investment funds received their WHT refunds. This marks the beginning of a broader reimbursement process, with the German Ministry of Finance projecting a total payout of €7.5 billion. However, securing refunds involves navigating complex compliance requirements, including:
Establishing comparability between foreign investment funds and German domestic funds.
Proving economic ownership of German dividend-bearing shares.
Retrieving tax vouchers for earlier application years.
Foreign corporate investment funds that filed withholding tax reduction claims under double tax treaty (DTT) provisions and EU law-based applications for a 0% WHT rate may be in a stronger position to substantiate their claims. In these cases, the Federal Central Tax Office (BZSt) typically already holds the original tax vouchers from the initial DTT-based refund submission. Instead of re-submitting these vouchers for the EU-law-based claims, funds can provide a copy of the BZSt’s decision on the DTT application or reference the corresponding case number to fulfill documentation requirements.
Strategic Considerations for Foreign Investment Funds
The recent rulings by the BFH mark a pivotal moment for foreign investment funds seeking equitable tax treatment in Germany. With an estimated €7.5 billion in refunds projected, the potential for redress is substantial, but so are the compliance challenges.
Foreign funds must act swiftly to:
Prove comparability with domestic German funds.
Substantiate economic ownership of dividend-bearing shares.
Ensure proper documentation for tax voucher requirements.
For funds with prior DTT-based claims, this presents a crucial opportunity to reclaim withheld taxes and secure fair treatment under EU principles. Proactively addressing compliance hurdles will be key to maximizing refunds and ensuring a smooth application process.
