Tax Treaty Case Law around the Globe 2014

S. 79Chapter 7 Germany: Hidden Profit Distributions under the German-Netherlands Tax Treaty and Transfer Pricing

Alexander Rust

7.1. Introduction

Corporations are subject to a corporate tax in Germany at a rate of 15%. Dividends paid by a corporation to its shareholders are not deductible at the level of the distributing corporation. If the shareholder is another corporation and this corporation holds at least 10% of the shares, the dividends are tax exempt. In this situation, 5% of the dividends received are deemed to be non-deductible expenses. If the corporation holds less than 10% of the shares, the dividends are fully taxable and all expenses linked to the shareholding are fully deductible. If the shareholder is an individual, he is subject to a 25% final withholding tax on the gross amount of the dividend. Advantages a shareholder receives from the corporation that have their causal link in the corporation-shareholder relationship are reclassified as "hidden profit distributions" (verdeckte Gewinnausschüttungen) and treated in the same way as dividends. In the case of hidden profit distributions, the payments made to the shareholder are no longer deductible at the level of the cor...