Germany: Repayment of nominal capital

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Germany: Repayment of nominal capital

linn.jpg

braun.jpg

Alexander Linn


Thorsten Braun

For multinationals with profit-making German subsidiaries, withholding tax on dividends can be an issue when repatriating profits from Germany, especially considering Germany's complex anti-treaty shopping rules and this often leads to an investor not receiving full treaty or EU directive benefits. Thus, opportunities to transfer cash from German subsidiaries by other means than dividends have become a consideration. For tax purposes, a distribution would usually be treated as a dividend (triggering withholding tax) and not as a repayment of capital (sourced from the tax equity account) as long as a company has distributable profits (E&P). Broadly speaking, once a company has had a balance sheet profit in one year, it can no longer directly access the tax equity account and would be deemed to pay dividends until the distributable profits have been consumed.

In a recent decision (IR 31/13), Germany's Federal Tax Court confirmed that a repayment of nominal capital would be treated as a repayment of capital for tax purposes, regardless of the amount of distributable profits. The decision confirms that a repayment of nominal capital allows taxpayers to directly access the tax equity account, meaning that the distribution will be treated as a repayment of capital for tax purposes. In that respect, the court even confirmed that a reduction and repayment of nominal capital do not necessarily have to take place within the same year and do not necessarily have to be included in the same shareholder resolution; this is legally required only for German stock corporations (AG), but not for German limited companies (GmbH). If a reduction and repayment of nominal capital are sufficiently closely linked and it is possible to demonstrate that the distribution was sourced from the reduction of nominal capital (and not from other capital or profit reserves), it would not be considered a dividend for tax purposes.

Alexander Linn (allinn@deloitte.de) and Thorsten Braun (tbraun@deloitte.de)

Deloitte

Tel: +49 89 29036 8558 and +49 69 75695 6444

Website: www.deloitte.com/de

more across site & shared bottom lb ros

More from across our site

Heads of tax need to push their teams forward as strategic business advisers to add value across the organisation, says Sandy Markwick
Scott Bessent reportedly felt undermined by Musk naming Gary Shapley as acting IRS commissioner; in other news, Baker Tilly will combine with a top 15 US firm
The promise of nine years’ tax certainty and a ‘rational and pragmatic’ government process makes APAs a no-brainer, Indian tax advisers tell ITR
Despite garnering significant revenues from multinationals, Italy’s digital services tax presents pressing double taxation issues, say Stefano Simontacchi and Francesco Saverio Scandone of BonelliErede
ITR’s research shows that in-house tax counsel in Asia also feel underserved by their advisers’ international networks
World Tax global head of research Jon Moore tells ITR how his team spots standout submissions, and gives early statistical insights into this year’s entries
Australia’s conservative opposition will repeal controversial tax agent reporting rules if elected in the country’s May general election
Shapley would be the fourth person to hold the job this year; in other news, UK tax advisory firm MHA raised fewer funds than expected from its London IPO
The US needs to be involved in pillar one for there to be more international acceptance of the project, Michael Masciangelo says
The UK regulator is investigating EY’s auditing of the national postal service as it relates to the high-profile Horizon scandal, which saw hundreds wrongfully convicted
Gift this article