Following the German Federal Fiscal Court's landmark decisions in March 2024, foreign investment funds are, in principle, entitled to a refund of German withholding tax levied on dividends during the period from 2004 to 2017 where the taxation infringed Article 63 TFEU (Free Movement of Capital).
WHT refunds started
The German Federal Central Tax Office (Bundeszentralamt für Steuern – BZSt) started processing applications and issuing refund payments in these EU cases, from December 2024.[1] After years of uncertainty, this development marks a significant milestone.
However, investment funds should not assume that pending reclaims applications will automatically result in a successful repayment. While the need for administrative appeal procedures is not uncommon, the enforcement via action before the German tax courts should be limited to exceptional cases.
Remaining hurdles
The substantive legal position has largely been clarified for EU investment funds via the named court decisions. There is no explicit case law for third-country funds, yet. The enforcement of refund claims continues to depend on several procedural and evidential requirements. In particular, the BZSt reviews whether the original refund application was filed within the applicable statutory limitation period and with the competent tax authority. This aspect is particularly relevant in older cases. Before jurisdiction was transferred to the BZSt in June 2021, uncertainty existed regarding the competent authority. Consequently, applications filed exclusively with the BZSt (instead of with the competent local tax office) face procedural objections despite the positive case law regarding the underlying EU law claim.
The tax authorities also examine whether the foreign fund is comparable to a German investment fund under the former German Investment Tax Act and whether the claimant fund can demonstrate beneficial ownership of the underlying shares and entitlement to the dividends and the related WHT. Additional questionnaires and requests by the BZSt for supporting documentation should therefore be expected, particularly where shares were acquired or disposed of within a short period before or after the relevant annual shareholders' meeting (dividend record date). Applicant investment funds that were liquidated in the meantime are another example for additional requests by the BZSt.
Compensatory interest
Besides the WHT refund itself, claimants are, in principle, also entitled to interest on unlawfully levied WHT. While the entitlement to interest has been confirmed by both the CJEU and the German Federal Fiscal Court, some calculation details remain to be clarified, including the applicable interest rate from 2019 onwards (6% or 1,8% p.a.) and specific aspects of the interest period. The 6% p.a. interest rate applies up to 2019. For the time being, these issues may delay the processing of interest claims, but they do not call into question the entitlement to compensatory interest as such.
Third-country funds
For third-country investment funds, those resident outside the EU/EEA (like US, UK or Canadian funds), the outlook likewise remains favourable. Based on the CJEU's established case law on the Free Movement of Capital, the prevailing view has long been that third-country funds should, in principle, benefit from the same protection as EU domiciled funds. A test case concerning a third-country investment fund is currently pending before the Hessian Fiscal Court and is widely expected to resolve most of the outstanding issues under the former German Investment Tax Act. At the same time, a recent referral by the German Federal Fiscal Court to the CJEU in another third-country dividend case has introduced renewed uncertainty regarding certain broader aspects of Article 63 TFEU. Fund managers should therefore continue to pursue existing claims while closely monitoring further judicial developments; WTS would be delighted to support with a pro-active strategy in order to expedite the refund process.
Outlook
Overall, the commencement of WHT refund payments marks a significant step forward—but successful recovery of German WHT still requires careful management of both the substantive and procedural aspects of each claim.
