The bill seeks to combat those Cum/Cum transactions where non-German equity investors lend or sell to German counterparties before the dividend due date; thereby enabling the German holders to claim a refund of WHT. The current draft of the bill had stipulated that the proposed changes would apply to dividends received from 1 January 2016. This bill was, however, not enacted in time for the start of 2016.
Conditions required to claim a refund
In order to claim a tax credit or refund on German equity and stock the German taxpayer must meet the following conditions:
- The taxpayer must have been both the legal and economic owner of the equity;
- The taxpayer must be exposed to at least 30% risk of change in value in relation to the equities (reference value being the fair market value at the time of the acquisition of the equities); and
- The securities must have been held by the taxpayer for 45 cumulative days, within the period starting 45 days before the dividend pay date, ending 45 days after the dividend pay date. Days where the taxpayer is exposed to less than 30% risk of change in value do not count; nor does the day of disposal count.
Scope of application
The draft bill does not apply to foreign taxpayers. It applies only to German tax-resident and non-German tax resident, income and corporate income taxpayers, which are taxed by way of tax assessment in Germany.
Provisions on the WHT procedure have not been modified. Accordingly, there would appear to be no implications for custodian banks already withholding the WHT on German dividends; the taxpayers are obligated to pay the tax.
Following the reasoning of the Ministry of Finance’s first draft, securities lending transactions will not satisfy the 30% limit. This will result in a potentially significant impact on the securities finance market, specifically in relation to the demand by German borrowers for loans of German equities.
If the taxpayer hedges for more than 70% of the risk, then the second condition will not be met. It does, however, allow for a less than 70% hedge transaction.
The provisions do not apply to long-term investments, that is, where the taxpayer has been the (legal and economic) owner for at least one year at the time the dividends are received. In addition, the restrictions do not apply if the dividends received within the year do not exceed €50,000.
Promulgation of the final legislation is not expected until mid 2016. The final draft could be significantly different to the current bill. We will keep you updated on further developments as they arise.