Interest on capital gains tax withheld in violation of EU law

Debtors of investment income are obliged to withhold, pay and declare investment income tax in cross-border situations even if Germany has no right of taxation due to an existing double taxation agreement or under EU law. Investment income is only exempt from withholding tax if a valid exemption certificate is available or, in the case of remuneration for the transfer of rights, the exemption limit of EUR 10,000 is not exceeded. If the tax has been paid to the tax office, taxpayers can apply to the Federal Central Tax Office (FCTO) for a refund of the excess withholding tax levied under national law.

For some years now, however, the excessive processing times in the tax refund procedure at the FCTO have proven to be particularly problematic. This is because the taxpayer suffers liquidity disadvantages in the meantime, which are not compensated by the tax authorities due to the lack of relevant national interest regulations. In its ruling of February 25, 2025 (case no. VIII R 32/21), the German Federal Fiscal Court (BFH) has now made an important decision on the right to interest for foreign shareholder companies that are entitled to withheld capital gains tax on profit distributions in accordance with Art. 5 of the Parent-Subsidiary Directive in conjunction with Section 50d (1) sentence 2 of the German Income Tax Act (Einkommensteuergesetz; EStG) old version (now Section 50c (3) sentence 1 EStG).

In the case in dispute, a German stock corporation (AG) made profit distributions to its Austrian parent company in the years 2007 to 2011 and withheld and paid capital gains tax (plus solidarity surcharge) accordingly. The Austrian parent company was initially granted an exemption certificate for one of the profit distributions, but this was revoked on the basis of the presumption of abuse set out in Section 50d (3) EStG 2007. The FCTO initially refused to refund the capital gains tax withheld by the AG to the parent company on the same grounds. It only refunded the tax after the European Court of Justice ruled that this regulation was contrary to European law in December 2017 in the Deister Holding (C-504/16) and Juhler Holding (C-613/16) decisions. The dispute now centred on the Austrian parent company's applications for interest, which the FCTO continued to reject. The tax court and BFH essentially upheld the claim.

It is true that the parent company liable for tax in Germany is not entitled to interest on the refund amounts due to the lack of corresponding national interest regulations. However, the BFH derives the right to interest from EU law by analogy. It is decisive and sufficient for interest to be paid on the refund amounts that their withholding was based on an interpretation or application of the relevant national regulations that is contrary to EU law. This applies irrespective of the fact that the breach of Union law - as in the present case - is established in the context of an objection procedure; legal proceedings are not required.

The deduction of capital gains tax at the time of distribution - irrespective of the tax exemption pursuant to Art. 5 of the Parent-Subsidiary Directive and Section 43b EStG - in conjunction with a subsequent application-based refund of the tax deduction amounts as part of a two-part procedure is generally in compliance with EU law. In the present case, however, there was a breach of EU law in that the FCTO had detained the refund from the parent company on the basis of the provision in Section 50d (3) EStG 2007 and thus an incorrect interpretation and application of EU law, even if this was only determined later by the European Court of Justice.

Finally, the BFH also commented on the interest period. In cases in which the refund of capital gains tax is applied for without a prior exemption procedure and is detained in the refund procedure in violation of EU law, this begins three months after the submission of a formally correct refund application. In this respect, the BFH refers to the statutory three-month period as the maximum processing time in the exemption certificate procedure. In cases in which an initially issued exemption certificate is revoked by the FCTO in violation of EU law, the interest period begins on the date on which the capital gains tax is withheld by the distributing company. In any case, the interest run ends on the day the refund amount is paid out. The BFH also clarified that the interest for the respective interest periods must be calculated to the day and at an annual rate of 6 % (here: interest periods prior to January 1, 2019).