Part of the fee payable by the foreign client which is initially retained in anticipation of a potential foreign withholding tax liability of the German self-employed contractor is not immediately subject to income tax in the hands of the latter. According to a ruling of the Supreme Tax Court, the fee withheld is only subject to German income tax if the foreign customer settles the foreign (withholding)tax liability incurred on the total amount of the agreed fees.
The regional tax court of Rhineland-Palatinate had to decide whether, in the case of a right to choose between two methods of reducing foreign withholding tax, the taxpayer must ensure that foreign taxes are credited in as small an amount as possible. The regional tax court is of the opinion that it is at the discretion of the taxpayer if and how to use the option to which he is entitled and that this does not have an adverse impact on the general possibility of a foreign tax credit against his German income tax liability.
Dividend withholding tax paid by a foreign intermediary company may not be deducted from the taxable income of the local shareholder of a German company if the entire arrangement is abusive and if, therefore, the dividend income is to be allocated to the German shareholder.
