A recent new law abolished the former (domestic) participation exemption for German corporate income tax purposes for dividends derived from participations in corporations below a shareholding of 10%. For the time being, shareholders holding less than 10% in a corporation may still benefit from a participation exemption for corporate income tax purposes for any capital gains from the sale of shares in such participation.
Prior to the recent changes in corporate income tax law, dividends of a corporation distributed to another corporation were, in general and irrespective of minimum shareholdings or holding periods, exempt at (effectively) 95% from German corporate income tax (“CIT”, Körperschaftsteuer).
The recently amended Section 8b para. 4 of the German corporate income tax code (Körperschaftsteuergesetz, KStG) now excludes the application of said participation exemption for dividends received by a shareholder who directly held less than 10% of the share capital of the distributing corporation at the beginning of the respective calendar year. This new law is applicable to all dividends received after February 28, 2013.
Decisive for the participation threshold of the new Section 8b para. 4 KStG is the actual participation in the share capital of the corporation held by the shareholder at the beginning of the calendar year. In case a shareholder acquires at least 10% of the share capital of a corporation in the course of the year, this acquisition is deemed by law to have taken place at the beginning of the calendar year. The acquisition of less than 10% of shares in a corporation during the calendar year which leads to an accumulated participation above the 10% threshold of Section 8b para. 4 KStG does not have any effect on the taxation of dividends in the respective year. Correspondingly, the sale of shares during a year which leads to a participation below the 10% threshold, is irrelevant for the application of the said participation exemption.
In general, only directly held shares in the distributing corporation are to be considered for the participation threshold of the new Section 8b para. 4 KStG. Participations in corporations held through one or several partnerships are attributed to the respective partners pro rata to their respective (indirect) participation ratio.
The treatment of dividends for German trade tax purposes remains unchanged, as the new law affects only corporate income tax. Therefore, only in case the requirements of Section 9 No. 2a or No. 7 of the German trade tax code (Gewerbesteuergesetz, GewStG) are met (very simplified: e.g., participation of at least 15%), a shareholder may benefit from trade tax participation exemption (gewerbesteuerliches Schachtelprivileg).
For the time being, effectively 95% of the capital gains derived from the sale of shares in another corporation remain, in general, tax exempt irrespective of minimum shareholdings or holding periods. However, during the legislative procedure also a taxation of such capital gains with respect to the sale of shares by shareholders holding less than 10% has been discussed intensely. According to a statement of the German government, now the taxation of capital gains and the respective participation exemption shall be monitored closely. Due to the differing taxation of dividends and capital gains from the sale of shares (with some tax planning potential, e.g., so-called ballooning), it cannot be excluded that in future tax bills the taxation of capital gains of shares may be tighten in line with the aforesaid amended taxation of dividends.
Given the recent changes in the taxation of dividends we would recommend to consider structuring and tax planning options in case of existing and, in particular, intended participations in corporations of less than 10%.