Any company or partnership holding foreign shares or bonds in a securities account will encounter a tax issue with every dividend or interest payment that is easily overlooked: foreign withholding tax. This is because not every euro withheld by another country can be offset against tax in Germany.
What is withholding tax and why is it so complex?
If a foreign company pays out dividends, the relevant country deducts a portion directly at source before the amount reaches the German bank account. Whilst the custodian bank shows this amount, it does not provide any guidance on how it should be treated for tax purposes. That remains the responsibility of the accounts department and the tax adviser.
In principle, any foreign withholding tax is divided into two parts. Firstly, the so-called residual rate: this is the maximum tax rate that the relevant double taxation agreement (DTA) permits the source country to apply. Under the OECD Model Tax Convention, this is usually 15 per cent for free-float dividends. This portion can be credited in Germany. Secondly, there is the excess: any amount retained by the source country in excess of this. This amount can only be reclaimed abroad; for example, in Switzerland using a specific refund form.
What rules apply to limited liability companies (GmbHs) and companies limited by shares?
In the case of a GmbH or AG, the creditable foreign withholding tax is set off against German corporation tax. This sounds simple, but there is a crucial limitation: the set-off is capped at a maximum amount, which is determined by the ratio of foreign income to the total tax liability. There is no credit against trade tax.
This will become particularly relevant from 2028 onwards: the corporation tax rate is set to be gradually reduced from 15 to 10 per cent. This will also reduce the maximum amount eligible for credit. With a residual rate under a double taxation agreement (DTA) of 15 per cent, around 5 percentage points would remain permanently as a non-deductible tax expense from 2032 onwards. This is a factor that should already be taken into account when planning the return on a company investment portfolio.
A specific example illustrates this: A GmbH receives a Swiss dividend of 10,000 euros. Switzerland withholds 35 per cent, i.e. 3,500 euros. Only 1,500 euros (15 per cent DTA rate) are creditable. A receivable from the Swiss tax authorities is capitalised in the balance sheet for the remaining €2,000. From 2032 onwards, only €1,000 of the €1,500 can actually be credited; €500 remains as a final tax liability.
What are the rules for partnerships and trusts?
In the case of a GmbH & Co. KG or another partnership, the income and withholding tax are attributed to the individual partners. This allocation is only made in each partner’s personal tax return. Under commercial law, withholding tax is not treated as an expense for the partnership, but as a withdrawal charged to the partners’ accounts.
Charitable foundations, on the other hand, do not pay corporation tax on investment income; therefore, there is nothing against which such tax could be set off. For them, the full refund of the excess tax paid abroad is particularly important, because any withholding tax that is not reclaimed directly reduces the funds available for the foundation’s purpose.
What does this mean in practice?
Anyone who holds a company securities account should check, for each foreign dividend, what proportion is tax-deductible, what proportion can be reclaimed from the source country, and what proportion remains as a permanent tax liability. It is essential to meet the deadlines for submitting refund claims. In Switzerland, for example, the entitlement expires three years after the end of the year in which the payment became due.
The accounting treatment is also clearly regulated: the deductible portion constitutes a tax expense, whilst the refundable surplus must be capitalised as a receivable. Anyone who fails to follow this system risks both tax disadvantages and an inaccurate balance sheet. Individual advice from a tax adviser is strongly recommended for company investment portfolios containing foreign holdings.
Source: Haufe: Tax
This post and the accompanying image were created with the help of AI and have been editorially reviewed.
