Authored by Justus Eisenbeiss
WTS Tax AG – Director, International Corporate Tax and M&A Tax
This is the first post in our series on hot topics in German tax law. The series is authored by two German tax experts from our cooperation partner WTS Germany, Gabriele Rautenstrauch (Gabi) and Justus Eisenbeiss, who are currently on secondment in the U.S. Be sure to read our introductory blog post here, or reach out to your GTM contact if you want to connect with Gabi or Justus directly.
Note: This issue was already discussed during the WTS Global Countries Update panel at our one-day summit, FUSION 2025 (see blog post here).
Since late 2025, there have been a significant number of cases where the German Federal Central Tax Office (Bundeszentralamt für Steuern, FCTO) has denied relief from German dividend withholding tax (WHT) under the U.S.-Germany Double Tax Treaty when dividends are paid by a German corporation (e.g., a GmbH) that is disregarded for U.S. federal tax purposes to its U.S. shareholder. While a recent statement suggests that, contrary to initial concerns, this does not represent a fundamentally new approach, uncertainty remains for U.S. investors, as the FCTO has not yet officially clarified its position.
Illustrative example:
We recommend reviewing your German structure to determine whether it falls within the scope of the revised practice.
Background: German Dividend WHT on Distributions to a U.S. Shareholder
Under the U.S.-Germany Double Tax Treaty, dividend WHT may be reduced to 15%, 5%, or 0%, subject to applicable requirements, including the Limitation on Benefits clause.
However, under domestic law the distributing German entity is generally obliged to withhold, report, and remit WHT at the full statutory rate of 26.375% upon distribution unless the U.S. shareholder holds at the time of the distribution a valid dividend WHT exemption certificate (Freistellungsbescheinigung) issued by the FCTO, permitting the distributing German entity to partially or fully abstain from its withholding obligation in accordance with the U.S.-Germany Double Tax Treaty.
In the absence of a dividend WHT exemption certificate, the U.S. shareholder may apply for a refund of any German WHT remitted by the distributing entity, in accordance with the applicable rate under the U.S.-Germany Double Tax Treaty.
New Administrative Practice Denying Dividend WHT Relief on Distributions by Disregarded German Corporations to U.S. Shareholders?
Historically, the U.S. tax classification of the German distributing corporation was irrelevant for German WHT purposes. Since late 2025, there have been a significant number of cases where the FCTO argues that treaty relief may need to be denied as a matter of principle when the German distributing entity (directly held by a U.S. shareholder) is disregarded for U.S. federal tax purposes. The revised approach applies to both the exemption and refund procedures.
The reasoning brought forward by the FCTO is based on an expansive (mis-)interpretation of certain rules both of German domestic law and of the U.S.-Germany Double Tax Treaty:
- Section 50d (11a) German Income Tax Act (ITA)
- Section 50d (14) ITA (applied analogously)
- Article 1 (7) U.S.-Germany Double Tax Treaty
The FCTO takes the position that these provisions may be triggered by a hybrid mismatch arising from the divergent qualification of the German disregarded entity. In the present circumstances, the distributing corporation is treated as tax-opaque for German direct tax purposes. In contrast, for U.S. federal income tax purposes, it qualifies as a mere branch of its U.S. shareholder. Consequently, Germany characterizes the payment as a dividend distribution, whereas, from a U.S. tax perspective, the transaction is merely an intra-entity transfer of funds.
There have been no relevant legislative changes, and this would reflect a mere shift in administrative interpretation. In our view, there are substantial technical arguments against the FCTO’s position based on the wording of the law and the treaty (supported by German tax academic literature), which could be brought forward in appeal proceedings against an eventual denial of WHT relief. Furthermore, a recent ruling by the German Federal Finance Court (Bundesfinanzhof), published on May 28, 2026, concerning the former version of Section 50d (11a) of the ITA, further weakens the FCTO’s position.
Partial Reversal of the FCTO’s New Administrative Practice?
The FCTO has encountered substantial pushback from taxpayers and advisors against this new approach. In response, the FCTO indicated that the revised interpretation is still being analyzed and that no final position has been adopted yet.
On August 7, 2026, the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer, or IDW) published a short online statement reporting on discussions with the FCTO. The statement noted that – in apparent contradiction to administrative practice since late 2025 – the FCTO has not revised its principal position on treaty relief for distributions by German disregarded entities. Instead, it intends to only target specific cases where a hybrid mismatch could result in taxation in neither Germany nor the U.S. (double non-taxation).
The FCTO, the German Federal Ministry of Finance (Bundesministerium der Finanzen), and the IRS are engaged in ongoing discussions. The FCTO and the IDW have agreed that, for typical cases, a self-certification from the dividend recipient is currently sufficient to prove they are not receiving double tax relief in the U.S. An agreed-upon template for this self-certification has been provided for download in both German and English.
While the softened position of the FCTO inferred from the IDW’s statement would certainly be welcome, uncertainty remains. This is largely due to the apparent discrepancy with the FCTO’s actual administrative practice since late 2025 and its provided reasoning for rejecting relief as well as the ongoing discussions with the IRS.
Recommended Actions
We recommend:
- Reviewing your German structure to determine whether it falls within the scope of the revised practice
- Monitoring further developments regarding the FCTO’s position where your structure may be impacted
- Where an existing exemption certificate remains valid, consider making (advanced) distributions before the certificate’s expiration
- If relief is denied, evaluate appeal options based on the specific facts
- Assess potential restructuring measures to no longer fall within the scope of this change in administrative practice
