Trade tax: Dividend income exemption in case of double residence

According to the Lower Tax Court of Hesse, the dividend income exemption for trade tax on qualifying shareholdings is also available for distributions of companies of foreign legal form - provided the foreign company is comparable to a German corporation, has its place of management and thus a permanent establishment in Germany.

Sec. 9 no. 2 a of the Trade Tax Act (TTA) protects profit distributions on shares in non-tax exempt domestic companies (…) from trade tax. The investment - at the beginning of the tax period - must at least be 15 per cent and the distributions be included in the trading profit (which is the starting point to determine the final and overall trading income subject to trade tax).

The plaintiff (a GmbH) was the sole shareholder of a Belgian partnership (BVBA). The sole managing director of BVBA was a natural person (A) with sole residence in Germany. BVBA is undisputedly similar to a corporation for German tax purposes. It did not engage in any active business and otherwise held a 14 % stake in a Mexican corporation (CV). In 2009, the latter made a profit distribution to BVBA in respect of its 2008 earnings and BVBA further distributed these profits to the GmbH. The tax office included 95 per cent of the dividend from BVBA to the plaintiff's trading income subject to trade income tax.

Sec. 9 No. 2a TTA also applicable to foreign legal entities

The Hesse tax court held that the conditions for a trade income tax exemption are met. The term "domestic company" includes not only corporations with domestic management established in Germany, but also legal entities established abroad with a place of management in Germany. That is true here, since A (the managing director of BVBA) was a German resident individual.

BVBA - through A - has a German domestic place of management and is per se the subject of trade tax in accordance with Sec. 2 (1) sentence 3 TTA (permanent establishment through domestic management). According to the Lower Tax Court, denial of the trade tax exemption would lead to double trade tax burden on the distribution in Germany.


Lower Tax Court of Hesse, judgment of October 19, 2018 (8 K 1279/16); appeal is pending before the Supreme Tax Court (case I R 43/18)

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