Reform of taxation of free floating dividends for corporate income tax purposes

The German Parliament (Bundestag) and the German Federal Council (Bundesrat) reached an agreement regarding the taxation of free floating dividends received from holdings of less than 10 % (Streubesitzdividenden). In future and with respect to companies, these dividends shall be subject to general taxation.

With its bill to implement the ECJ judgement of 20 October 2011 in Case C-284/09, the German Parliament originally intended to extend the already existing tax exemption for companies which are subject to unlimited tax liability to EU/EEA companies which are only subject to limited tax liability or rather enabling a repayment of taxes withheld. The German Federal Council initially disagreed with this project but agreed to the following compromise:

- Free floating dividends paid to companies which are subject to unlimited tax liability and companies which are subject to limited tax liability shall, in future, be subject to corporate income tax in both cases. The previous tax exemption according to Section 8b Paragraph 1 CITA (Corporate Income Tax Act) is not applicable – according to Section 8b Paragraph 4 CITA (new) – if the respective participation in the capital of the company amounts to less than 10 % at the beginning of the calendar year.

- The current tax exemption of capital gains derived from the alienation of shares or stocks in a company according to Section 8b Paragraph 2 CITA remains unchanged. With respect to this exemption, the participation in the capital of the company is irrelevant.

- The German Reorganisation Tax Act and the Investment Tax Act will be modified to reflect the new law in order to ensure a synchronism between the respective tax acts.

- The new law is applicable to dividend distributions received after 28 February 2013.