The distribution of profits by a subsidiary to its parent company incurs a capital gains tax of 25 %. If the parent company is a limited company or another corporation, it would in fact only have to pay a corporation tax of 0,75 % on this dividend. In other words, taxation at source, which is the capital gains tax, leads to an overall overpayment of the tax. Although a refund is made for this purpose, this may take some time. Fortunately, you can but with an application for permanent overpayers according to § 44a Abs. 5 EStG avoid the withholding of capital gains tax by the subsidiary. Because then you get from the tax office an exemption certificate, with which you exempt the subsidiary from the obligation to pay the capital gains tax. However, the prerequisite for this is that the parent company does not develop its own business activities. This is particularly the case if the parent company is a holding GmbH.

Application for permanent overpayers – how to avoid the capital gains tax

1. Capital gains tax on dividends of affiliated companies

When a subsidiary distributes profits to its parent company, the subsidiary must observe a special rule. In such a case, the subsidiary is obliged to withhold a capital gains tax of 25 % on the dividend and pay it to the tax office. In this respect, the practice is similar to the withholding of capital gains tax, to which banks are also obliged.

2nd application for permanent overpayment: corporation tax vs. capital gains tax

But if the parent company is a corporation (for example, a GmbH) or another corporation, then we must also consider how it taxes the dividend of its subsidiary. Thus § 8b KStG stipulates that in such a case the dividend in principle remains tax-free. However, a lump sum of 5 % of the dividend is taken into account as operating expenses for which the tax exemption is excluded. Thus, there is ultimately a albeit low taxation of the dividend within the framework of the corporate tax assessment.

But if the parent company actually has to pay far less tax on the dividend than the amount that the subsidiary pays to the tax administration under the capital gains tax, then this is somewhat absurd. One should therefore assume that the parent company will be refunded the difference between capital gains tax and corporate income tax. In fact, this is the case, but it usually takes a long time before the parent company receives this tax refund.

For example, a subsidiary may wish to pay a dividend of EUR 100,000 to its parent company in December 2019. However, following its legal obligation, it pays an amount of EUR 25,000 to the financial administration. The remaining EUR 75,000 will then be received by the parent company. However, the parent company does not submit its corporate tax return to the tax office until December 2020. Until this then sets the corporation tax, thus determining that the subsidiary has already long overpaid the tax, further months may pass. During this period, the parent company therefore essentially has to waive the difference of EUR 24,250.

So now we are looking for a way to avoid this potentially annual massive overpayment of the tax. In fact, there is such a possibility. Because the legislator has also recognized this phenomenon. That is why he introduced § 44a EStG as a legal norm. Paragraph 5 of that provision stipulates that no deduction must be made (by capital gains tax) if the recipient of the distribution of profits is permanently exposed to a higher burden of capital gains tax due to the nature of his business than his income tax or corporate income tax. And this is exactly what we have in our case.

Therefore, the parent company may submit an application to the tax administration to obtain an exemption from the obligation to withhold and pay the capital gains tax by the subsidiary. Of course, the tax office then examines the application. As soon as the request is accepted, the applicant parent company shall receive an exemption certificate. It then passes this on to its subsidiary, because only by obtaining the exemption certificate does its legal obligation to withhold capital gains tax cease to apply.

4. Requirements for the application for permanent overpayments

What is in very general form as a legal norm in § 44a EStG also contains a very important prerequisite for avoiding capital gains tax. This concerns the nature of the transactions of the taxpayer receiving the distribution of profits. Its nature – a formulation that could hardly have been more general now – must therefore be such that in the long run a lower income tax or corporate income tax is incurred than the amount that previously goes to the Treasury under the capital gains tax. Only if this condition is clearly met, the tax office returns the application with an exemption certificate.

So we are dealing in particular with the type of business a corporation is allowed to conduct in order to meet the requirements for an application for permanent overpayment. In essence, only economic activities which result in a tax which is lower than the 25 % capital gains tax are eligible. So what kind of income is eligible? On the one hand, of course, the dividends already mentioned. Furthermore, interest income is also possible, because it is usually very low and therefore hardly has the potential to lead to a tax that is above the capital gains tax. Thirdly, capital gains are also eligible. To the extent that such a sale is not of a commercial nature, this constitutes a one-off situation. We are therefore faced with an exceptional situation which runs completely counter to the criterion of durability.

Other requirements for an application for permanent overpayers are also that the applicant is a taxable person who is either unrestricted or limited and that the distribution of profits to the taxable person constitutes an operating income.

It remains only to clarify who will benefit most from an application for permanent overpayers. In fact, the answer is already obvious. Because a holding company in the legal form of a GmbH, which itself does not operate an operative business, is almost predestined as a parent company to submit an application for permanent overpayment. Finally, such a holding company receives the profit distribution of an operating subsidiary, but hardly any other income. At most, interest or the sale of shareholdings are still possible with a holding company. And because such disposals are exceptions, they play no role in the application for permanent overpayers. In addition, the capital gains tax which the subsidiary is obliged to pay, with 25 % of the dividend, is always higher than the 15 % corporation tax which the holding company regularly pays on the 5 % of the dividend (100 x 5 % x 15 % = 0,75 %).