The German Federal Fiscal Court’s (BFH) recently published its ruling on the “L-Fund case” dated 11 October 2023, following the European Court of Justice judgement of 27 April 2023 (C‑537/20).

The recent BFH decision has far-reaching implications for foreign investment funds who suffered German tax on their income from investments in Germany before 1 January 2018, especially regarding the “Fokus Bank” WHT reclaims filed by foreign securities investment funds[1].

Understanding the L-Fund case

The decision at issue revolves around the German taxation of a Luxembourg Real Estate Fund (FCP, non-UCITS) before 1 January 2018, specifically concerning income derived from German real estate. The court contends that subjecting such funds to German taxation is both discriminatory and unjustified, because comparable German funds were exempt from similar taxation.

Industry impact and implications

Beyond its application to real estate funds, the BFH decision at issue carries significant implications for numerous WHT reclaims filed by non-German securities funds, which were subject to German WHT on dividend income before 1 January 2018.

Notably, the BFH rejects the argument posed by the German Ministry of Finance that non-German funds could only benefit from the WHT exemption available to similar German funds if they levied German WHT on the distribution of German source real estate income to their investors. The BFH dismisses this argument in the case of non-German real estate funds, thereby signalling positive implications in favour of foreign securities funds seeking WHT reclaims, too.

On 13 March 2024, the oral hearing took place before the BFH in the case of two foreign securities funds seeking the reclaim of WHT they had suffered on German dividend income before 1 January 2018. The judges did not disclose the content of their upcoming decision. At length, however, the BFH asked about and discussed the topic of interest (potentially) owed on the WHT levied. The fact that this discussion on interest seemed to be of high relevance to the judges might indicate a future taxpayer-friendly BFH decision, which is expected within the next few months.

Conclusion

The arguments presented by the BFH indicate potential success for pending reclaim applications by non-German securities funds that suffered German WHT on their dividend income pre-2018. WTS suggests claimants prepare for further substantiation of filings, especially in the case of applications originally filed in minimal form.

WTS will gladly assist in enforcing German WHT refund applications, both before the German tax authority as well as before a German tax court, taking full advantage of the newly gained momentum from the above BFH decision.

Latest development

On 4 April 2024, WTS received information on the outcome of the 13 March 2024 hearing before the BFH in the related – and important – cases of two foreign securities funds seeking the reclaim of WHT they had suffered on German dividend income before 1 January 2018.

The BFH now referred both proceedings back to the tax court of first instance due to unclear findings of fact. However, the reasons for this referral have not been published yet. There could be uncertainty regarding the facts underlying the classification of the foreign securities funds or regarding the question of allocation of dividend income to the plaintiffs or regarding details for the calculation of interest on the amount of a refund, as all of these items were discussed during the oral hearing on 13 March 2024.

Nevertheless, the request of the highest German tax court for further clarification of the facts seems to indicate that the legal arguments of the taxpayers are not without merit. The prognosis thus is that the main proceedings on the question of the justification of the foreign securities funds’ claim for reimbursement of German dividend WHT will be won.

It is expected that the reasons of the BFH for the decisions will be available in July / August 2024.

[1] Since the 4 year statute of limitations for the reclaim of WHT suffered before 1 January 2018 is expired by now, the BFH decision positively impacts pending applications only.

If you wish to discuss these topics, please contact:

WTS Germany

Original text you can find here.