CJEU confirms that the German withholding tax on dividends paid to non-resident pension funds is discriminatory and not compatible with Article 63 TFEU

CJEU confirms that the German withholding tax on dividends paid to non-resident pension funds is discriminatory and not compatible with Article 63 TFEU

The College Pension Plan of British Columbia (CPPBC) is a tax-exempt pension fund under Canadian law with the legal form of a common-law trust. The CPPBC received dividends from German listed companies from 2007 to 2010, on which 15% withholding tax (WHT) was levied based on the Double Tax Treaty between Germany and Canada.

However, German pension funds are treated differently. Firstly, these funds are, in principle, subject to a corporate income tax rate of 15% — but in practice, German law allows them to deduct technical reserves to safeguard future pension liabilities. This means that only their net income is subject to 15% corporate income tax.

Additionally, dividends distributed by German companies to German pension funds are withheld at a 25% rate. However, under German law, this WHT can be credited against the fund’s income tax liability. And should there be a credit excess, the German tax authorities will reimburse this excess without limit.

As a result of this treatment, German pension funds are fully, or at least partially, exempt from tax. Conversely, a non-resident pension fund like the CPPBC is liable to pay 15% WHT in Germany, which is considered a final tax that cannot be reclaimed.

Under these circumstances, the CPPBC applied for a refund of German withholding taxes, arguing that it was being discriminated against. The German tax authorities denied this request. The CPPBC then appealed this decision to the Munich Fiscal Court. In October 2017, the Fiscal Court requested a preliminary ruling from the Court of Justice of the European Union (CJEU) on whether the German dividend WHT is compatible with the free movement of capital.

On 13 November 2019, the CJEU ruled that this German legislation was not compatible with EU Law. This constitutes an unjustified infringement of the free movement of capital between Member States and third countries, based on Articles 63 to 65 of the Treaty on the Functioning of the European Union (TFEU).

Despite German law levying a higher rate (25%) of WHT on dividends paid to resident pension funds compared with the CPPBC (15%), the CJEU identified that German pension funds end up almost entirely tax exempt when German law is applied.

Consequently, non-resident pension funds — subject to a 15% final WHT — are treated less favorably. As the German rules benefit to their own pension funds, making them more attractive to investors compared with foreign pension funds, this ultimately results in restricting the free movement of capital under EU Law.

Following the TFEU and the CJEU jurisprudence, once a restriction is identified, it must be verified that it is justified.

At the outset, the CJEU determined whether there was a justification under Article 65(1)(a) of the TFEU, which allows Member States to distinguish between taxpayers who are not in a comparable situation regarding the place of residence and investment of capital.

To determine this, the CJEU first assessed whether the applicable tax system for German resident pension funds provides for a partial or full exemption of dividends by allowing the deduction of technical reserves.

Concerning this, the CJEU decision emphasized that should a non-resident pension fund also allocate the dividends received to its pension provisions — whether voluntarily or due to regulatory requirements — it should be in a comparable situation to a German pension fund.

The CJEU then explained that the Standstill clause did not apply to the case at hand. The Standstill clause is a grandfathering rule that allows the existence of rules restricting the free movement of capital between Member States and third countries if:

  1. these rules already existed before 31 December 1993 and
  2. they relate to capital movements that involve direct investment, establishment, the provision of financial services or the admission of securities to capital markets.

The Court noted that the German legislation already in place on 31 December 1993 had been amended since. This includes in 2002 introducing legislation addressing the specific situation of pension funds, which led to a less advantageous tax treatment of non-resident pension funds.

Also, and perhaps even more importantly, the Court noted that portfolio investments do not fall within the material scope of the Standstill clause because they do not qualify as direct investments. Nor did the present case qualify as the provision of financial services. Therefore, in these circumstances, the Standstill Clause does not apply.

Finally, the CJEU rejected justifications to restricting the free movement of capital based on the protection of public interest. Referring to its settled case law, the Court considered and rejected possible justifications based on:

  1. the need to ensure a balanced allocation of taxing rights
  2. the need to safeguard the coherence of the German tax system
  3. the need to ensure the effectiveness of fiscal supervision.

Given the above, the CJEU decided that the German legislation unjustly restricted the free movement of capital that does not fall within the scope of the Standstill clause.



In our view, the decision is very beneficial to both EU and non-EU pension funds interested in reclaiming WHT in Germany. It has established a precedent that German resident pension funds may benefit from a more advantageous tax treatment in the form of a WHT refund, due to the tax-deductibility of their technical reserves. And it also establishes that not allowing comparable non-resident pension funds to reclaim German WHT breaches EU law.

Also, by deciding that the Standstill clause does not apply and, more importantly, by providing clear guidance on its application, the CJEU created a precedent that could be used by other non-European investment vehicles in reclaiming German WHT. These include third-country investment funds and insurance companies.

For over 5 years, Globe Refund has helped investment funds, pension funds and insurance companies reclaim unduly-levied WHT in several jurisdictions, including Germany. If you have any questions, please contact one of our experts — they will be delighted to support you.