Tax discrimination in Germany: CJEU ruled in favor of the foreign investors

Tax discrimination in Germany: CJEU ruled in favor of the foreign investors

On Thursday 27th April 2023, the Court of Justice of the European Union issued a new judgement in the case C-537/20, containing important good news for foreign (EU and non-EU) investment funds which suffered German withholding tax (WHT) before 1 January 2018.

In this case, the CJEU ruled that tax legislation in a Member State which makes non-resident specialized property funds (precisely here a Luxembourg closed-end fund, with no legal personality) partially liable to corporate income tax in respect of the income from renting and selling real estate properties in Germany, while exempting resident specialized property funds from that tax, is in violation of the Free Movement of Capital (Article 63 TFEU).

The good news of this case:

  • Non-German real estate investment funds which suffered taxation on German sourced real estate income during the period prior to 2018 were discriminated against compared to German real estate funds
  • Regarding equities investment funds, the judgement has positive implications for their refund of German WHT levied on dividend income before 2018
  • The Court reiterates that different treatment based solely on the place of residence of the funds may introduce unjustified restrictions on the free movement of capital
  • The case also provides some interesting insights in the proportionality analysis. Whilst in the Fidelity Funds case (C-480/16), the CJEU suggested less restrictive measures by looking at the tax equivalent paid at the fund level, the case at hand considered the situation of the investors.

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