There has been considerable legal uncertainty about the withholding of capital gains tax on dividends paid to companies outside the EU (i.e., in third countries). In its decision published on 7 August 2025, Germany’s Federal Fiscal Court (BFH) asked the Court of Justice of the European Union (CJEU) to rule on whether the German rules in this area are compatible with the fundamental EU freedoms, specifically the freedom of establishment and the free movement of capital principles.
A Japanese corporation that is the sole shareholder of a German corporation received dividends from the German subsidiary in years 2009 to 2011. The German subsidiary withheld a 15% capital gains tax from the dividends in accordance with the Germany-Japan tax treaty and paid the tax to the tax authorities, which settled the corporation’s German tax liability. In Japan, the company was able to offset the Germany withholding tax against Japanese corporate income tax. However, following a change in Japanese law, the dividends were 95% tax-exempt as from 1 April 2009, which meant that the offset, which was possible in principle, was largely ineffective in view of the low Japanese tax rate. As a result, the Japanese corporation considered itself to be at a disadvantage compared to German parent companies that receive dividends from German subsidiaries, as the latter are entitled to a credit and, if applicable, a refund of capital gains tax when assessing their corporate income tax. Thus, the Japanese corporation took the position that the withholding of capital gains tax constituted a violation of the free movement of capital pursuant to article 63 of the Treaty on the Functioning of the European Union, and the withheld capital gains tax should be refunded. The tax court took a different view and dismissed the action seeking the issuance of exemption notices.
The BFH considers several legal issues to be doubtful under EU law:
Roland Speidel
BDO in Germany
Facts of the Case
A Japanese corporation that is the sole shareholder of a German corporation received dividends from the German subsidiary in years 2009 to 2011. The German subsidiary withheld a 15% capital gains tax from the dividends in accordance with the Germany-Japan tax treaty and paid the tax to the tax authorities, which settled the corporation’s German tax liability. In Japan, the company was able to offset the Germany withholding tax against Japanese corporate income tax. However, following a change in Japanese law, the dividends were 95% tax-exempt as from 1 April 2009, which meant that the offset, which was possible in principle, was largely ineffective in view of the low Japanese tax rate. As a result, the Japanese corporation considered itself to be at a disadvantage compared to German parent companies that receive dividends from German subsidiaries, as the latter are entitled to a credit and, if applicable, a refund of capital gains tax when assessing their corporate income tax. Thus, the Japanese corporation took the position that the withholding of capital gains tax constituted a violation of the free movement of capital pursuant to article 63 of the Treaty on the Functioning of the European Union, and the withheld capital gains tax should be refunded. The tax court took a different view and dismissed the action seeking the issuance of exemption notices.The BFH considers several legal issues to be doubtful under EU law:
- The central question is whether the EU freedom of establishment overrides the free movement of capital as a test criterion. This is because the Japanese company—a company based in a third country—cannot invoke the freedom of establishment because that principle does not extend to persons outside the EU.
- If the free movement of capital is applicable, however, it is doubtful whether the withholding tax deduction violates this freedom because the Germany-Japan tax treaty provides for German capital gains tax to be credited against Japanese corporate income tax, and this is ineffective only due to changes in Japanese law.
- In the event of a violation or restriction of the free movement of capital, the BFH is of the opinion that the withholding of German capital gains tax can be justified by the allocation of taxation rights under the treaty, but in view of the CJEU's jurisprudence on dividend distributions between companies of two EU member states, has doubts as to whether this assessment is compatible with EU law. It should also be noted that the Japanese parent company would be granted double benefits on the dividends due to the Japanese tax exemption already claimed when the withholding tax is refunded.
- Finally, if there is an unjustified restriction, the reimbursement modalities must be assessed. Reimbursement would probably only be considered in the amount of the German capital gains tax that is not creditable in Japan. A refund of the tax withheld would therefore have to be made conditional on the Federal Central Tax Office being able to verify the information provided by the parent company on the basis of an exchange of information with the Japanese tax authorities. However, as this goes beyond the requirements for German parent companies, it could constitute an independent restriction on the free movement of capital.
BDO Insight
The legal uncertainties surrounding the final withholding tax burden on investments from third countries are an obstacle to new investments and corporate restructuring. In this respect, clarification of the issues by the CJEU will be welcome. Comparable cases should be kept open with appropriate legal remedies until the EU high court issues its ruling in the case, and for active restructuring projects, taxpayers should continue to monitor developments.Roland Speidel
BDO in Germany