German Tax Court confirms interest on withheld dividend withholding tax

On May 15, 2025, the German Federal Tax Court decided that interest must be paid when withholding tax on dividends is refunded, if the German Federal Tax Office holds the withholding tax without evidence of abuse. The decision involves an Austrian company that owned shares in a German firm, where withholding tax and a solidarity surcharge were applied to dividends between 2007 and 2011.

The company sought exemption from this tax under the Parent-Subsidiary Directive, but the German Tax Office initially refused and later revoked the exemption certificate, citing anti-abuse rules. In 2018, the Tax Office refunded the withholding tax and surcharge after a European court ruled that the German rules were contrary to EU law.

The company requested interest on the refunded amounts for the period they were withheld, which was initially denied. However, the Federal Tax Court confirmed that under EU law, interest must be paid if national regulations violate European law. The conditions for interest, such as rate and calculation method, are determined by national law if there are no harmonized EU rules. Interest begins to accrue either 3 months after a refund application is submitted or from the date the tax was withheld if the exemption certificate was revoked. It ends on the day the tax authorities return the funds. In Germany, the current interest rate is 0.5 % per month, calculated daily.

Significance of the judgment for foreign investors

This judgment is particularly significant for foreign investors in Germany. The decision of the Federal Tax Court strengthens the position of foreign investors and holding companies against German tax authorities. It sends a clear signal that if the state withholds money in violation of EU law, it must bear the consequences, including the obligation to pay interest.