ECJ-referral: Trade tax addback of portfolio dividends in 2001

The Supreme Tax Court has asked the European Court of Justice (ECJ) for a preliminary ruling on the question whether the trade tax addback of foreign portfolio dividends in the year 2001 is in line with the EU provision on the free movement of capital in Article 63 TFEU (formerly: Article 56 TEC).


The plaintiff is a public law institution subject to corporation profits tax (cpt) and trade tax and which operates a life insurance company. In 2001 (year of dispute), the plaintiff held a direct shareholding in several foreign corporations, each with a stake of less than 10% (portfolio investment). From these portfolio investments the plaintiff received dividends in the year in dispute.

In an application dated April 2004, the plaintiff exercised the so-called block option to which life and health insurance companies were entitled at the time. As a result, 20% of the dividend income from the portfolio investments in the foreign corporations were not to taken as income when determining the profit relevant for cpt purposes pursuant to Sec. 8b (1) of the Corporation Tax Act (CTA) in the version applicable to the year in dispute.

With reference to the add-back provision in Sec. 8 No. 5 Sentence 1 Trade Tax Act, however, the tax office – for the assessment period 2001 - added back the 20% of the distributions received which were not subjected to corporation profits tax.

The referral question submitted to the ECJ by the Supreme Tax Court

Is Art. 56 TEC (now Art. 63 Abs. 1 TFEU) to be interpreted as precluding legislation of a Member State under which, in determining the basis of assessment for a corporation's trade tax, dividends from holdings in foreign corporations of less than 10 % (portfolio holdings) are added back to the assessment basis (here: for trade income tax purposes), provided that those dividends have been deducted from the tax base in a previous step (here: when calculating income subject to cpt). (The result of the add-back is that the dividends are fully subject to trade tax).

In the year of dispute, Sec. 8b (1) CTA (whereby 20% of dividends are not to be taken as income for cpt purposes) only applied to dividends from foreign shareholdings, but not (yet) to ordinary distributions from domestic corporations with their registered office or place of management in Germany, which were paid out in 2001.

In a ruling from 2015 in a comparable case, the referring Senate of the Supreme Tax Court considered the fact that the add-back provision of Sec. 8 No. 5 of the German Trade Tax is to be applied to dividend income from foreign shareholdings for the first time already for the 2001 assessment period Act – this was different to the treatment of dividend income from domestic shareholdings - to be a disadvantage for shareholdings in foreign corporations, which contradicts the freedom of capital movement. After further examination, the court considers his previously held view now as doubtful. Hence the request to the ECJ for a preliminary ruling.

Note: The preliminary ruling and the final decision by the Supreme Tax Court in the case of dispute is of particular and direct relevance for the year 2001 alone, as the unequal treatment between domestic and foreign investment income no longer existed in 2002.


Supreme Tax Court decision of 23 November 2021 (I R 5/18), published on 14 April 2022

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