A dome\u00adstic com\u00adpa\u00adny which holds a sta\u00adke in for\u00adeign part\u00adner\u00adships and recei\u00adves tax-exempt divi\u00addends or capi\u00adtal gains from them must nevert\u00adhel\u00adess accept a flat-rate addi\u00adti\u00adon of notio\u00adnal busi\u00adness expen\u00adses. This appli\u00ades even if the inco\u00adme in ques\u00adti\u00adon is exempt from tax in Ger\u00adma\u00adny under a dou\u00adble taxa\u00adti\u00adon agree\u00adment (DTA). This was ruled by the M\u00fcns\u00adter Finan\u00adce Court in its jud\u00adge\u00adment of 23 June 2026 (Ref. 9 K 552\/22 K).<\/p>\n
A dome\u00adstic com\u00adpa\u00adny held share\u00adhol\u00addings in a lar\u00adge num\u00adber of pri\u00adva\u00adte equi\u00adty firms abroad. Some of the\u00adse com\u00adpa\u00adnies car\u00adri\u00aded on busi\u00adness and main\u00adtai\u00adned per\u00adma\u00adnent estab\u00adlish\u00adments abroad. The divi\u00addends, wri\u00adte-ups and capi\u00adtal gains deri\u00adved the\u00adr\u00ade\u00adf\u00adrom were exempt from tax in Ger\u00adma\u00adny under the rele\u00advant dou\u00adble taxa\u00adti\u00adon agree\u00adments and were the\u00adr\u00ade\u00adfo\u00adre not taken into account for Ger\u00adman tax purposes.<\/p>\n
Nevert\u00adhel\u00adess, during a field audit, the tax office added a flat-rate amount for busi\u00adness expen\u00adses. This was based on sec\u00adtion 8b(3), first sen\u00adtence, and sec\u00adtion 8b(5), first sen\u00adtence, of the Cor\u00adpo\u00adra\u00adti\u00adon Tax Act (KStG). The\u00adse pro\u00advi\u00adsi\u00adons sti\u00adpu\u00adla\u00adte that 5 per cent of tax-exempt divi\u00addends and capi\u00adtal gains are trea\u00adted as non-deduc\u00adti\u00adble busi\u00adness expen\u00adses, and are the\u00adr\u00ade\u00adfo\u00adre added to taxa\u00adble inco\u00adme. The com\u00adpa\u00adny con\u00adtes\u00adted this, arguing that this notio\u00adnal tre\u00adat\u00adment should only app\u00adly if the hypo\u00adthe\u00adti\u00adcal expen\u00adses, had they actual\u00adly been incur\u00adred, would have been sub\u00adject to Ger\u00adman tax. In the case of per\u00adma\u00adnent estab\u00adlish\u00adments exempt under a dou\u00adble taxa\u00adti\u00adon agree\u00adment, this was not the case.<\/p>\n
The M\u00fcns\u00adter Finan\u00adce Court dis\u00admissed the cla\u00adim. In the jud\u00adges\u2019 view, Sec\u00adtion 8b of the Cor\u00adpo\u00adra\u00adti\u00adon Tax Act (KStG) does not depend on whe\u00adther the notio\u00adnal expen\u00adses would, in func\u00adtion\u00adal terms, be attri\u00adbu\u00adta\u00adble to a for\u00adeign per\u00adma\u00adnent estab\u00adlish\u00adment. The pro\u00advi\u00adsi\u00adon deli\u00adbera\u00adte\u00adly appli\u00ades a flat-rate approach and express\u00adly excludes pro\u00adof that the actu\u00adal expen\u00adses were lower.<\/p>\n
It is also cru\u00adcial that the so-cal\u00adled \u2018dome\u00adstic con\u00adnec\u00adtion\u2019 is estab\u00adlished not by the DTA, but by the unli\u00admi\u00adt\u00aded lia\u00adbi\u00adli\u00adty to cor\u00adpo\u00adra\u00adti\u00adon tax under sec\u00adtion 1(2) of the Cor\u00adpo\u00adra\u00adti\u00adon Tax Act (KStG). The exemp\u00adti\u00adon under the DTA does not, in sub\u00ads\u00adtance, affect this dome\u00adstic tax sta\u00adtus. To put it ano\u00adther way: the DTA deter\u00admi\u00adnes whe\u00adther Ger\u00adma\u00adny is entit\u00adled to tax the com\u00adpa\u00adny, not whe\u00adther the com\u00adpa\u00adny is sub\u00adject to tax at all. As the com\u00adpa\u00adny is sub\u00adject to unli\u00admi\u00adt\u00aded tax lia\u00adbi\u00adli\u00adty in Ger\u00adma\u00adny, the addi\u00adti\u00adon rule appli\u00ades regard\u00adless of which sta\u00adte is assi\u00adgned the right of taxa\u00adti\u00adon under the DTA.<\/p>\n
This jud\u00adge\u00adment has signi\u00adfi\u00adcant con\u00adse\u00adquen\u00adces for com\u00adpa\u00adnies that hold shares in for\u00adeign part\u00adner\u00adships or pri\u00adva\u00adte equi\u00adty funds. Even if the inco\u00adme gene\u00adra\u00adted is ful\u00adly exempt from Ger\u00adman tax under the terms of a tax trea\u00adty, a tax lia\u00adbi\u00adli\u00adty amoun\u00adting to 5 per cent of the tax-exempt inco\u00adme remains. This see\u00admingly para\u00addo\u00adxi\u00adcal con\u00adse\u00adquence is a deli\u00adbe\u00adra\u00adte fea\u00adture of the sys\u00adtem, but is often over\u00adloo\u00adked in practice.<\/p>\n
The tax tre\u00adat\u00adment should be careful\u00adly exami\u00adned, par\u00adti\u00adcu\u00adlar\u00adly in the case of share\u00adhol\u00adding struc\u00adtures invol\u00adving seve\u00adral for\u00adeign tiers and dif\u00adfe\u00adring dou\u00adble taxa\u00adti\u00adon agree\u00adment (DTA) rules. Anyo\u00adne hol\u00adding or plan\u00adning to hold such share\u00adhol\u00addings should take the impli\u00adca\u00adti\u00adons of Sec\u00adtion 8b of the Cor\u00adpo\u00adra\u00adti\u00adon Tax Act (KStG) into account at an ear\u00adly stage in their tax plan\u00adning. The jud\u00adge\u00adment is not yet final; it is not curr\u00adent\u00adly known whe\u00adther an appeal will be lodged.<\/p>\n
If you have any ques\u00adti\u00adons regar\u00adding the cor\u00adpo\u00adra\u00adti\u00adon tax tre\u00adat\u00adment of for\u00adeign share\u00adhol\u00addings and the distinc\u00adtion bet\u00adween tax trea\u00adty exemp\u00adti\u00adons and dome\u00adstic tax adjus\u00adt\u00adments, it is advi\u00adsa\u00adble to seek indi\u00advi\u00addu\u00adal tax advice.<\/p>\n