Private investors who hold shares in a foreign company face a tricky question: when that company distributes payments or assets in kind, is this a taxable dividend or a tax-free return of capital? In a recent judgement, the Cologne Finance Court has clarified just how high the hurdles actually are for proving a tax-free repayment of capital by foreign companies (Cologne Finance Court, judgement of 18 March 2026, ref. 9 K 2340/17).
What is the reasoning behind this principle?
Income tax law makes a clear distinction between two types of payments that a company may make to its shareholders. Profit distributions, i.e. dividends, are taxable. If, on the other hand, a company returns capital previously contributed, this is treated for tax purposes in a similar way to the repayment of a loan: the mere return of the capital itself remains tax-free.
In the case of German limited companies, the tax office monitors this distinction automatically. Every domestic company maintains a tax contribution account, the balance of which is determined annually by a separate tax assessment notice. This ensures that it is clear to all parties involved whether a payment originates from taxed profits or from contributed capital.
The problem with foreign companies
This automatic mechanism does not apply to foreign companies. A tax contribution account is not maintained for them ex officio. Whilst foreign companies may apply to the German tax office to have such an account established, if they do not do so, the burden of proof lies entirely with the shareholder themselves.
That was precisely the crux of the dispute: a married couple held shares in the British Vodafone Group. In 2014, Vodafone divested itself of its stake in its American subsidiary, Vodafone Americas Finance. As part of this transaction, the claimant received not only a special cash dividend but also shares in the US company Verizon Wireless. The custodian bank withheld capital gains tax on both payments. The couple took the view that the allocation of shares constituted, at least in part, a tax-free repayment of capital.
A reconciliation statement is mandatory under German tax law
The Cologne Fiscal Court dismissed the claim at the second instance. The claimants had failed to provide sufficient evidence of the repayment of capital contributions. In concrete terms, this means that anyone wishing to prove that a payment made by a foreign company constitutes a tax-exempt repayment of capital must convert the balance sheet figures under foreign commercial law into a so-called reconciliation statement in accordance with German tax law. Merely submitting foreign commercial balance sheets is not sufficient for this purpose.
Only once this reconciliation has been carried out can the tax office verify whether, according to German standards, contributions were in fact repaid and no taxable distribution of profits took place. This requirement presents many private investors with considerable practical difficulties, as it necessitates in-depth knowledge of both foreign and German tax law.
What does this mean for investors?
The judgement is not yet final. The claimants have lodged an appeal with the Federal Fiscal Court, where the case is pending under reference number VIII R 13/26. The final decision is still pending.
For private investors with holdings in foreign companies, this case nevertheless already illustrates just how complex the tax treatment of such inflows can be. Anyone in this situation who wishes to claim a refund of capital gains tax should seek tax advice at an early stage in order to prepare the necessary supporting documentation in good time and in full.
Source: Haufe: Tax
This post and the accompanying image were created with the help of AI and have been editorially reviewed.
