Two separate recent developments affect German withholding tax (“WHT”) on dividends paid to US shareholders by German subsidiaries. Both arise where a hybrid entity is involved, i.e., where a company is treated as a tax-opaque corporation in one country and as tax-transparent in the other country:
- Development 1 (Good News) – For a US hybrid entity (specifically a so-called S-Corporation) as the recipient of a dividend distribution by a German corporation, the Federal Fiscal Court (Bundesfinanzhof) has affirmed the S-Corporation’s eligibility for benefits under the US-Germany double tax treaty (“US-Germany DTT”) and granted full relief from German dividend WHT.
- Development 2 (Bad News) – Since late 2025, there has been a significant number of cases where the German Federal Central Tax Office (Bundeszentralamt für Steuern, “BZSt”) apparently changed its longstanding administrative practice and now regularly denies treaty relief from German dividend WHT where the distributing German corporation (typically a GmbH) is disregarded for US federal tax purposes. While a recent statement suggests that, contrary to initial concerns, this does not represent a fundamentally new approach, uncertainty remains for US investors, as the BZSt has not yet officially clarified its position.
I. Background
Under the US-Germany double tax treaty (“DTT”), dividend WHT may be reduced to 15%, 5%, or 0%, subject to applicable requirements (including the Limitation on Benefits clause).
However, under domestic law, the distributing German entity is generally obliged to withhold, report, and remit WHT at the full statutory rate of 26.375% upon distribution. This applies unless the (US) shareholder holds at the time of the distribution a valid dividend WHT exemption certificate (Freistellungsbescheinigung) issued by the BZSt. This certificate permits the distributing German entity to partially or fully abstain from its withholding obligation in accordance with the US-German DTT.
In the absence of a dividend WHT exemption certificate, the US shareholder will suffer the 26.375% WHT, but may apply for a refund in accordance with the applicable rate under the US-German DTT.
II. Good News: Full treaty relief for a (hybrid) US S-Corporation
On 11 March 2026 (decision I R 13/23, published on 28 May 2026), the Federal Fiscal Court addressed whether treaty entitlement must be determined at the level of a hybrid US entity or at the level of its shareholders.
The case concerned a US S-Corporation that held all the shares in a German GmbH. For US federal income tax purposes, an S-Corporation is treated as a pass-through entity, meaning that it is generally not subject to federal income tax at the corporate level. Instead, its income is attributed directly to its shareholders (here: individuals and trusts). However, for purposes of applying the US-German DTT, Germany performs its own classification of foreign entities (so-called comparison of legal type test, Rechtstypenvergleich). In the case at hand, the dividend-receiving S-Corporation was treated as a tax-opaque corporation rather than a transparent entity for German tax purposes.
Because the US attributed the S-Corporation’s dividend income to its shareholders, the BZSt effectively tested the shareholders’ treaty entitlement rather than the company's. As individuals and trust, they qualified for the 15% DTT rate (at most), and the refund was limited accordingly instead of covering the full WHT. In doing so, the BZSt relied on Section 50d (1) sentence 11 of the German Income Tax Act (Einkommensteuergesetz, "ITA") old version (today with identical wording in Section 50d (11a) ITA).
The court dismissed the tax authority's arguments and confirmed WHT relief in full, ruling that treaty entitlement must be tested at the level of the S-Corporation, not its shareholders. The court held that Section 50d (1) sentence 11 ITA, on which the BZSt had relied, merely determines who is entitled to submit the refund application (procedural effect), but does not determine substantive treaty entitlement.
The court’s reasoning is not limited to S-Corporations. It covers any foreign shareholder that Germany qualifies as a tax-opaque corporation while the foreign jurisdiction treats it as tax transparent. In the US context, this could also apply particularly to US limited liability companies (“LLC”) receiving dividend distributions from German corporations.
Recommended action:
- Identify hybrid US recipients of German dividends that Germany treats as tax-opaque corporations while the US treats them as tax-transparent (particularly S-Corporations and LLCs).
- Where treaty relief from German dividend WHT is or was denied or limited by the FCTO to the rate available to the shareholders or members of the hybrid entity although the recipient itself (here: the hybrid S-Corporations and LLC) would qualify for 5% or 0%, assess options to claim the lower treaty rate (e.g. in the refund procedure).
III. Bad News: No treaty relief where the German subsidiary is disregarded in the US
Since late 2025, the BZSt has frequently challenged relief from German WHT under the US-German DTT where dividends are paid to US shareholders by a German corporation (e.g., a GmbH) that is disregarded for US federal tax purposes. The revised BZSt approach constitutes a departure from its longstanding administrative practice and applies both in the exemption and refund procedures.
In such structures, Germany treats the payment as a dividend distribution by the German corporation, whereas for US federal tax purposes it is regarded merely as an internal transfer within the same taxpayer. According to the BZSt, this hybrid mismatch justifies denying treaty relief under Sections 50d (11a) and (14) ITA as well as under Article 1 (7) of the US-German DTT.
In our view, there are compelling legal arguments against this position based on both the wording of the relevant provisions and the treaty, a view that is also supported by German academic literature and there has been significant pushback from taxpayers and advisors. Moreover, the Federal Fiscal Court’s recent ruling of 11 March 2026 (see above) should further strengthen the case against the BZSt position.
On August 7, 2026, the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer, “IDW”) published a short online statement reporting on discussions with the BZSt. According to the statement, the BZSt has not revised its principal position on treaty relief for distributions by German disregarded entities, but intends to target only specific cases where a hybrid mismatch could result in double non-taxation. To facilitate relief in typical cases, the BZSt and IDW have agreed that a self-certification from the dividend recipient, confirming they are not receiving double tax relief in the U.S. (template available in German and English), currently suffices. Nevertheless, while discussions with the IRS remain ongoing, uncertainty persists as this apparent softening conflicts with the BZSt's actual administrative practice since late 2025 and its stated reasoning for denying relief.Recommended action:
- Establish whether any German corporation in the structure is disregarded in the US and distributes (directly) to a US shareholder.
- Review existing exemption certificates and where an existing exemption certificate remains valid, consider making (advance) distributions before the certificate’s expiration.
- If treaty relief is denied, evaluate appeal options based on the specific facts.
The Federal Fiscal Court's decision provides welcome certainty for structures involving hybrid US holding entities. At the same time, the BZSt revised administrative practice creates significant uncertainty for structures involving German disregarded entities, making a timely review of existing WHT positions advisable.
