CJEU: German withholding tax on dividends paid to pension funds contrary to EU law

The case in question involved College Pension Plan of British Columbia, a Canadian pension fund   that received dividends from German joint-stock companies in 2007 to 2010. Under the Canadian-German double taxation treaty, the dividend was subject to a 15% withholding tax. The fund requested a refund of the withholding tax, arguing that it was discriminatory when compared to taxation of German (resident) funds. While the withholding tax rate for resident funds is higher (25%), because of the calculation mechanism (the possibility to deduct technical provisions for future pension liabilities and to offset the tax against the final tax with a possibility of refund of any excess tax paid), the taxation of resident funds was in fact significantly lower.

With respect to German resident pension funds, the court pointed out that the German legal regulation leads to a complete or at least partial tax exemption of dividends. Non-resident funds do not have such an option, and the withholding tax is final for them. The court concluded that a non-resident pension fund which uses the dividends received for pensions, whether voluntarily or as a result of regulatory requirements, is in a situation comparable to a German pension fund. However, it is for the referring court to assess whether this is the case in the situation at hand.

The court concluded that a less favourable treatment of non-resident pension funds constituted a restriction of the free movement of capital.  The restriction cannot be justified by overriding reasons in the public interest, such as the necessity and effectiveness of fiscal supervision. The Standstill Clause does not apply here either; this clause allows restrictions of the free movement of capital between member states and third countries existing on 31 December 1993 and includes direct investments such as investments in real estate, establishment, the provision of financial services or the admission of securities to capital markets. The court thus concluded that this aspect of German legislation is contrary to EU law.

The CJEU judgement opens the door for pension funds to request refunds of tax unlawfully withheld in member states. The free movement of capital applies not only to entities from member states, but also to those from third countries. The practical implication of the judgement thus goes beyond the borders of the European Union.