Germany vs. “Capital reduction Gmbh”, October 2014, Supreme Tax Court judgment I R 31/13

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A German company resolved a share capital reduction of €16 m in preparation for a capital repayment to avoid an IFRS consolidation requirement for its sole shareholder, a public utility. It took the reduction to capital reserve, waited as required by the German Company Act for one year after a public announcement to it’s creditors, reported the reduction to the German trade registry and repaid an amount of €4 m to the shareholder. This repayment was sufficient to reduce the assets below the level for the consolidation requirement.

The tax administration recharacterised the payment to a “dividend distribution” subject to withholding tax under the German Corporate Tax Act provision to the effect that payments to shareholders are deemed to be made from retained earnings unless unambiguously specified as repayments of share capital.

The Supreme Tax Court concluded that the unambiguous specification need not be solely in the capital reduction/repayment resolution itself. The reduction resolution stated being preparatory to a capital repayment to the shareholder, but did not state the (at the time unknown) amount.

It was clear from all the circumstances that the repayment followed the capital reduction as soon as the German Company Act permitted. There was every indication that a capital payment was intended and nothing to suggest that anything else had ever been contemplated. Accordingly, the court accepted the payment as a tax-free repayment of share capital, despite the interim booking as a capital reserve.

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