Baden-Württemberg Fiscal Court, 21 July 2010, Ref.: 1 K 332/09
Capital gains in Germany are subject to withholding tax of 25%. In accordance with Section 34c (1) EStG, the withholding tax paid abroad on foreign income, which corresponds to German income tax, is credited ex officio against German income tax (Section 34c (1) EStG).
However, this only applies as long as the income has been earned in the foreign state, is subject to German income tax and the withholding tax has not already been deducted elsewhere (e.g. by a managing fund company).
FactsThe plaintiff received income from capital assets in a foreign country with which a double taxation agreement with Germany existed.
This income was subject to withholding tax there, which corresponded to German income tax and was therefore generally creditable under German law.
The amount of German income tax due on the foreign income was therefore to be determined in accordance with Section 34c para. 1 sentence 2 EStG in such a way that the German income tax resulting from the assessment of the taxable income, including the German income tax resulting from the foreign income, is divided in the ratio of the foreign income to the total income, Section 34c para. 1 sentence 2 EStG.
The imputation has an effect on the average tax burden, as personal allowances, SA and extraordinary burdens are reduced proportionately as a result. As a result, the portion of the foreign withholding tax that exceeds the maximum amount calculated according to this formula is not credited and a so-called tax reduction potential remains unutilised (a carryover to the following year is not possible).
In this respect, the plaintiff was of the opinion that this calculation violated the principles of the free movement of capital in accordance with Art. 63 TFEU, as the prospect of losing the tax reduction potential would restrict the movement of capital.
FA Baden-WürttembergThe court referred to the relevant supreme court case law regarding these regulations. Although some of the literature argues that § 34c para. 1 EStG violates the free movement of capital, case law has so far denied that the provisions of § 34c para. 1 EStG violate EU law.
The BFH has expressly rejected an obligation of the legislator to refund foreign withholding taxes in the same way as domestic capital gains taxes if a credit against German income tax is not possible (BFH decision of 3 December 2003 I S 10/03 (PKH), BFH/NV 2004,525; the constitutional complaint lodged against this was also not accepted for decision. (BVerfG, decision of 9 September 2004).
A breach of EU law has also been denied in the case law of the tax courts to date (Cologne tax court, judgement of 11 July 2002, 7 K 8572/98, EFG 2002, 1391; Hamburg, decision of 14 March 2006 VI 373/03, Juris case law database; see also Hahn Juris PR 32/2006 note 5).
This also applies to the case law of the ECJ, according to which the country of domicile of the recipient of dividends can limit itself to crediting foreign withholding taxes only within the framework of the relevant DTA regulations (ECJ judgement of 14 December 2006, C 194/06 Orange European Smallcap Fund IStR 2008, 435).
Source: Baden-Württemberg Fiscal Court
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