Relief procedure according to Section 50c German Income Tax Act
Relief procedure according to Section 50c German Income Tax Act
For the first time, the German Federal Fiscal Court commented in its decision published on August 22, 2024 on reasonable processing time and interest claims in the case of a refund of German capital gains tax
Background
Debtors of capital gains or remunerations within the meaning of Section 50a German Income Tax Act (ITA) are required to withhold tax in cross-border cases unless a valid certificate of exemption in accordance with Section 50c para. 2 no. 1 ITA is presented or the requirements of the exemption limit of Section 50c para. 2 no. 2 ITA are met.This applies even if Germany has no taxation right under an existing double-taxation treaty or under Union law in accordance with the German anti-abuse rules.
Problem: lengthy refund procedure at the federal central tax office
In these cases, the only option open to the creditor of the remuneration or capital gain is the lengthy refund procedure at the Federal Central Tax Office (FCTO) in accordance with Section 50c para. 3 ITA to obtain a partial or full tax relief. The application for a refund must be submitted electronically and already represents challenges for foreign applicants when registering to use the FCTO online portal, which, according to the FCTO website, can currently take up to six weeks.After filing an application, the applicant unfortunately still must exercise patience. The FCTO already states on its website that the processing time for applications for the refund of tax on German capital gains can take more than 20 months. The Federal Government‘s answer to an inquiry on March 28, 2024 confirmed the impression among tax advisors that the processing times are actually even longer. According to this answer, the statistical average processing time for a refund procedure was 615 days. Given that a tax deduction must also be made if an application for a certificate of exemption has been submitted but not yet granted, the average processing time in the exemption procedure is also remarkable at 480 days. As a result, also aspects relating to statute of limitations must be considered in the course of the procedure.
The FCTO‘s current processing times are leading to significant liquidity disadvantages for companies with cross-border activities, which have so far not been adequately compensated for under national tax regulations.
Question of reasonable processing time
Section 50c para. 2 sentence 6 ITA stipulates that a decision on an application for exemption is to be made within three months of the submission of all necessary documentation. However, there is no specification of what exactly is meant by „submission of all necessary documentation“. In this respect, the FCTO is entitled to a certain level of discretion. Regarding the processing time for applications for refund, there is no legal regulation.Against this background, the statements made by the Federal Fiscal Court in its recent decision of March 13, 2024 (case no. I R 1/20), which was published on August 22, 2024 and in which the court commented for the first time on the duration of a reasonable processing time for an application for a refund of capital gains tax, are therefore most welcome. In the court‘s view, the tax authorities must be given a reasonable period of time to process the application for refund after it has been received. In this context, it would be appropriate to refer to the general deadline within which a taxpayer can expect a decision on his application for an administrative act. This period is six months.
Interest on the refund claim
According to the law, claims for refund in relation to withholding tax are generally not subject to interest (see Section 233a para. 1 sentence 2 German Fiscal Code (AO)). There is one exception regarding refunds of withholding taxes, which are to be refunded in accordance with Section 50g ITA. This regulation was implemented into the ITA in 2004 as the national implementation of the so-called Interest and Royality Directive.In its above-mentioned decision, the Federal Fiscal Court also granted an interest claim on the claim for a refund of capital gains tax levied on dividends in violation of EU law. This interest claim was justified by the case law of the European Court of Justice, according to which the claim for a refund includes not only the tax levied in violation of Union law, but also compensation for losses due to a lack of liquidity. Regarding the point in time from which interest is to be paid, the Federal Fiscal Court differentiated in the case under review concerning a foreign fund as to whether domestic funds also initially had to accept a withholding tax deduction when receiving domestic dividends. If this was the case, a violation of Union law was recognized and thus an entitlement to interest was granted only after a reasonable processing time regarding the refund procedure, and thus after six months had passed since the application for refund was received.
When calculating the interest claim, the Federal Fiscal Court pointed out that this must be done on a daily basis and that the interest rate is based on Section 238 AO. Whether a reduced interest rate of 0.15% per month should be applied from January 1, 2019 was left open. The latter was not needed to be decided based on the facts of the case and the already existing claim for interest relating to the judicial proceedings.
Need for action / possibilities for accelerating the process
The number of applications for refund submitted to the FCTO is growing. On the one hand, there is an increasing tendency that German companies - possibly also in view of recent case law on the transfer of know-how - qualify the remuneration to their foreign contractual partners as a license in cases of doubt and pay a withholding tax, even if only the provision of a service was the primary aim. On the other hand, tax audits where hidden profit distributions to foreign shareholders are identified also regularly lead to avoidable refund procedures if no certificate of exemption is held available. The FCTO is therefore faced with an increasing number of applications, for which the complex and fundamentally redesigned anti-abuse provision of Section 50d para. 3 ITA must also be considered when processing. These circumstances are reflected in the following statistics: In 2023, 35,411 applications for refund of capital gains tax were received by the FCTO (2022: 19,448), but only 13,818 were processed at the same time (2022: 13,410).In view of the increasing number of applications and their long processing times at the FCTO, it is even more important to proactively prepare and attach all documents and information when submitting an application for the first time in order to be able to provide appropriate evidence of the entitlement to relief and to avoid delaying queries from the FCTO.
In addition, it must be examined whether there may be a claim for interest under EU law and whether it should be claimed accordingly.