Challenges in Germany’s Dividend Withholding Tax Procedures

Germany and withholding tax for foreign investors

On 8 April 2024, the German government responded to inquiries regarding the status of dividend withholding tax (WHT) exemption and refund procedures for foreign shareholders. The revelations shed light on a concerning trend of mounting backlogs and prolonged processing times at the federal tax office (Bundeszentralamt für Steuern (BZSt)), prompting a deeper examination of the complexities within Germany’s tax reclaim system. 

Exploring the Landscape 

Germany imposes a domestic 26.375% WHT on dividends, with provisions for reduced or zero rates under double tax treaties (DTTs) or the EU parent-subsidiary directive. However, securing a WHT exemption certificate or refund demands meticulous documentation to prove compliance, a task further complicated by the anti-treaty shopping rule of section 50d (3) of the income tax code (ITC). Despite efforts such as the introduction of electronic filing in 2023, processing delays have persisted, raising concerns among stakeholders. 

Inquiry and Government’s response 

The revised anti-treaty shopping rule in 2021 brought the gears of processing at the federal tax office ground to a near halt, casting a shadow over the efficiency of WHT exemption certificates and refunds. Recent data from the government’s response letter sheds light on the magnitude of the challenge, revealing a staggering backlog and prolonged processing times that have left taxpayers, advisors, and business organizations on edge. 

The inquiry posed by opposition parties exposed critical insights into the state of affairs at the federal tax office. Notable questions and responses unveiled the scale of the backlog, with thousands of applications piling up awaiting attention. Shockingly, average processing times have extended to 480 days for exemption certificates and 615 days for refunds, exacerbating concerns over delays and administrative inefficiencies. 

A snapshot of the statistics underscores the gravity of the situation. With over 2,666 applications for dividend WHT exemption certificates pending and a staggering 61,341 registered applications for refunds (plus approximately 17,000 to 27,000 paper applications) pending, the backlog paints a stark picture of the challenges facing taxpayers navigating the system.  

The increasing rejection rates further compound the issue, signaling a growing burden on both applicants and the federal tax office. The data reveals a concerning trend – over the period from 2020 to 2023, there has been a notable rise in the number of rejected applications, indicating heightened scrutiny or complexity in the assessment process. In 2022, for example, despite a relatively stable number of applications filed, the rejection rate surged significantly, with 811 exemption certificates and 2,516 refund applications rejected. Similarly, in 2023, while the number of applications increased substantially, so did the rejection rates, with 676 exemption certificates and 2,942 refund applications being turned down.  

Additionally, it’s worth highlighting that these substantial responsibilities are managed by just 87 individuals within the federal tax office. Given Germany’s sizeable economy and its attractiveness to international investors, this staffing level seems insufficient. It underscores the necessity for increased resources and personnel within the tax office to adequately handle the workload and streamline processes, ultimately benefiting both taxpayers and investors. 

Key Takeaways and Recommendations 

Analysis of the inquiries highlights the urgent need for reform in Germany’s WHT procedures. The prolonged processing times not only strain cash flows for foreign investors but also jeopardize the country’s attractiveness for international investment. As rejection rates soar, affected taxpayers must adopt proactive strategies, including early filing of applications and meticulous documentation, to mitigate risks and navigate the labyrinth of tax regulations. 

The inquiry responses serve as a strong call to action, urging stakeholders to confront the systemic hurdles hindering Germany’s dividend WHT processes. By addressing the root causes of delays and rejections, policymakers can foster a climate conducive to international investment and uphold Germany’s reputation as a premier destination for business. 

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