Withholding tax on investment income in the case of the liquidation of a German subsidiary
If a domestic corporation is liquidated and profits are distributed to a parent corporation in another EU Member State during or upon completion of the liquidation, the question regularly arises as to relief from Kapitalertragsteuer (withholding tax on investment income) and the solidarity surcharge. As a starting point, the withholding tax is withheld and remitted by the distributing company. The recipient foreign parent company may claim a partial or full refund if the statutory requirements are met.
§ 43b EStG (German Income Tax Act) is of particular importance in this respect. The provision serves to implement the Parent-Subsidiary Directive and, in the case of distributions to EU parent companies, may lead to full relief from withholding tax at source. In liquidation cases, however, the provision contains restrictions that in practice often prevent a full refund.
In its judgment of 03.03.2026, case no. VIII R 8/24, published on 15.05.2026 with press release no. 031/26, the Bundesfinanzhof (BFH, Federal Fiscal Court) commented on one aspect of this issue. The judgment bears the ECLI:DE:BFH:2026:U.030326.VIIIR8.24.0. It concerns the distribution of profits that had already arisen before the start of the liquidation but were only distributed after the liquidation had begun.
Starting point of the BFH proceedings
Parties and procedural history
The claimant was a Société Anonyme with its registered office in the Grand Duchy of Luxembourg. It was the sole shareholder of a German GmbH. This GmbH was dissolved as of 31.12.2010, subsequently entered liquidation and was deleted from the commercial register on 20.10.2015.
The subject matter of the proceedings was two distributions by the GmbH based on resolutions of 12.11.2013 and 29.11.2013; according to the published information, only the profit distribution based on the resolution of 12.11.2013 was still in dispute before the Bundesfinanzhof (BFH, Federal Fiscal Court). The application for refund and exemption was received by the Bundeszentralamt für Steuern (Federal Central Tax Office) on 08.12.2015. The relief sought concerned withholding tax on investment income and the solidarity surcharge; the specific amounts are anonymised in the published text of the judgment.
The lower court was the Finanzgericht Köln (Cologne Fiscal Court) with judgment of 26.10.2022, case no. 2 K 2446/19. The Finanzgericht (Fiscal Court) had upheld the action except for the part attributable to the final liquidation payment. This part was no longer in dispute in the proceedings before the Bundesfinanzhof. Following the Fiscal Court judgment, an appeal against denial of leave to appeal was initially pending under docket number VIII B 145/22, from which the subsequent appeal on points of law arose.
The appellant on points of law was the Bundeszentralamt für Steuern (Federal Central Tax Office). The Bundesfinanzhof dismissed its appeal on points of law against the judgment of the Finanzgericht Köln as unfounded and thus confirmed the decision of the lower court to the extent still in dispute.
Headnote of the decision
The headnote of the Bundesfinanzhof states that § 43b Abs. 1 Satz 4 EStG (German Income Tax Act) does not apply insofar as the domestic subsidiary corporation distributes, after the start of liquidation, profits that arose before the opening of the liquidation proceedings.
The Bundesfinanzhof bases this result on an interpretation of § 43b EStG (German Income Tax Act) in conformity with the directive. Withheld and remitted withholding taxes on such distributions must therefore be refunded in full if the further requirements of the relief provision are met. The court expressly addressed a possible obligation to refer the matter to the Court of Justice of the European Union but refrained from doing so.
The tax authorities have decided to publish judgment VIII R 8/24 in the Bundessteuerblatt Teil II (Federal Tax Gazette Part II). The corresponding list entry is dated 04.08.2026. The decision is therefore to be applied generally beyond the individual case decided. In addition, the decision has been included in the database of national case law of the Court of Justice of the European Union.
Classification of the distributed profits
Importance of temporal and economic allocation
In the case of a corporation, a distinction must be made between the activity before dissolution and the activity after the start of liquidation. Before dissolution, the company regularly pursues its original corporate purpose. Upon the dissolution resolution, this is replaced by the winding-up of the company.
This caesura may be significant for tax purposes. It is therefore relevant to which period the distributed profits are attributable. The decisive factor is not merely when the distribution resolution was adopted or the payment was made. Rather, an allocation is required as to whether the profits arose before dissolution or only through liquidation measures.
For this distinction, the tax balance sheets and accounting records in particular may be relevant, provided they are correct and complete. Reliable documentation of the periods in which the profits arose is therefore essential for classifying the income.
§ 20 Abs. 1 Nr. 1 EStG and § 20 Abs. 1 Nr. 2 EStG
For tax purposes, a distinction must be made between investment income under § 20 Abs. 1 Nr. 1 EStG (German Income Tax Act) and receipts under § 20 Abs. 1 Nr. 2 EStG (German Income Tax Act). § 20 Abs. 1 Nr. 1 EStG covers, in particular, profit shares and other receipts from shares, GmbH interests and comparable participations. § 20 Abs. 1 Nr. 2 EStG concerns receipts arising after the dissolution of a corporation within the meaning of § 20 Abs. 1 Nr. 1 EStG, insofar as they do not already fall under § 20 Abs. 1 Nr. 1 EStG.
This distinction is particularly relevant for liquidation cases because § 43b Abs. 1 EStG, according to its wording, refers only to investment income within the meaning of § 20 Abs. 1 Nr. 1 EStG. Receipts under § 20 Abs. 1 Nr. 2 EStG are therefore not expressly included within the scope of application.
The purpose of § 20 Abs. 1 Nr. 2 EStG is to treat certain transactions after the dissolution of a corporation not as transactions similar to disposals, but as distributions of profits. In addition to the timing of the distribution, economic causation is decisive. If the underlying profits were only generated by the liquidation, this supports classification under § 20 Abs. 1 Nr. 2 EStG. If, by contrast, the profits originate from the period before dissolution, they must be classified upon distribution as income under § 20 Abs. 1 Nr. 1 EStG.
Limits of the BFH decision
The Bundesfinanzhof confirmed this view for distributions resolved during the liquidation period that concerned profits from the period before dissolution. By contrast, the Bundesfinanzhof did not decide on the classification of profits that were generated before dissolution but are only distributed as part of the final liquidation distribution or as a final payment to the shareholders. This point was no longer in dispute in the appeal proceedings.
The Finanzgericht Köln had assumed a different classification for the part attributable to the final liquidation payment. In doing so, it relied on the wording of the distribution resolution, according to which the remaining profit balance was distributed “to terminate the liquidation”. However, this part of the decision was no longer reviewed by the Bundesfinanzhof.
An exclusive reliance on the wording of the distribution resolution is not convincing for income tax classification purposes. A purely temporal assessment also appears insufficient. Rather, the decisive factor should remain when and as a result of what the profits arose. Profits that were already generated before dissolution and are only distributed upon completion of the liquidation therefore support classification as income under § 20 Abs. 1 Nr. 1 EStG.
Relief under § 43b EStG
Withholding tax deduction and refund procedure
If a German corporation distributes profits to a foreign parent company, the parent company is generally subject to limited corporation tax liability in this respect. The distributing subsidiary must withhold and remit withholding tax on investment income. This tax deduction initially takes place irrespective of whether, under § 43b EStG or under a double taxation treaty, a lower withholding tax deduction or full relief may be considered.
However, the creditor with limited tax liability of the investment income may apply to the Bundeszentralamt für Steuern for a refund. Through this procedure, the burden may be reduced to the level that is permissible under national law, EU law or an applicable double taxation treaty.
In relation to Luxembourg, in the case constellation decided, the double taxation treaty provided, as a benchmark, for withholding tax retention of 10%. By contrast, if § 43b EStG applies, the withholding tax deduction is eliminated entirely.
Requirements concerning the parent company
Relief under § 43b EStG further requires that, at the time the tax arises, the EU parent company demonstrably held a direct participation of at least 10% in the German subsidiary corporation continuously for twelve months. These requirements were also decisive in the context of the Bundesfinanzhof’s decision.
According to its regulatory concept, the provision benefits distributions to parent corporations with their registered office in another EU Member State. It is therefore closely linked to the Parent-Subsidiary Directive, the objective of which is to avoid withholding taxes on certain profit distributions within the European Union and to prevent economic double taxation within corporate groups.
Relationship with the Parent-Subsidiary Directive
Difference between Art. 4 and Art. 5 of the Directive
The Parent-Subsidiary Directive distinguishes between taxation at the level of the parent company and withholding tax at the level of the subsidiary. Art. 4 of the Directive concerns the treatment of incoming profit distributions at the parent company level. This provision contains an express exception for profits distributed on the occasion of the liquidation of the subsidiary.
Art. 5 of the Parent-Subsidiary Directive, by contrast, concerns withholding taxation at the level of the subsidiary. This provision provides for an exemption of distributed profits from withholding tax without containing a corresponding restriction for liquidation cases. For § 43b EStG as a withholding tax rule, Art. 5 of the Directive is therefore decisive.
The statutory design of § 43b EStG is problematic to the extent that restrictions from the regulatory sphere of Art. 4 of the Directive were incorporated into a withholding tax rule. This is particularly evident in § 43b Abs. 1 Satz 4 EStG, which excludes investment income within the meaning of § 20 Abs. 1 Nr. 1 EStG from the benefit if it accrues on the occasion of the liquidation of the subsidiary.
Interpretation in conformity with the directive by the BFH
In the case decided, the Bundesfinanzhof interpreted § 43b Abs. 1 Satz 4 EStG in conformity with the directive to mean that the provision does not apply insofar as profits that had already arisen before the start of liquidation are distributed after the start of liquidation. This made it possible to obtain a full refund of the withheld and remitted withholding tax on investment income and the solidarity surcharge for the distributions at issue.
However, this decision expressly concerns the distribution of retained profits during the liquidation period. It was not finally decided how liquidation proceeds within the meaning of § 20 Abs. 1 Nr. 2 EStG are to be treated in the context of a final liquidation distribution under § 43b EStG and Art. 5 of the Parent-Subsidiary Directive.
Nevertheless, there are weighty reasons for interpreting the scope of Art. 5 of the Parent-Subsidiary Directive broadly in this respect as well. The term distributed profits is not exhaustively defined in the Directive. According to the case law of the Court of Justice of the European Union, it encompasses dividends and other income from securities. The recitals also refer to dividend payments and other profit distributions. This suggests that the concept of distribution should not be narrowly limited to specific national categories of income.
Liquidation proceeds and protection under EU law
Applicability of the Parent-Subsidiary Directive to companies in liquidation
It could be argued that a company in liquidation is no longer operating in the market and that liquidation proceeds are therefore not covered by the protection of the Parent-Subsidiary Directive. Such a view is not convincing, however. The dissolution of a company does not retroactively terminate the parent company’s investment decision protected under EU law.
The internal market under Art. 26 Abs. 2 TFEU (Treaty on the Functioning of the European Union) ensures the free movement of goods, persons, services and capital. In the case of an EU parent company that was economically active in Germany through a German subsidiary, the participation is protected by the freedom of establishment under Art. 49 Abs. 1 Satz 2 TFEU. This protection covers not only the establishment and exercise of the participation, but also its termination and winding-up.
The same applies to the free movement of capital under Art. 63 TFEU. The investment in a subsidiary corporation in another Member State and the subsequent repatriation of the proceeds from the liquidation fall within the scope of protection of this fundamental freedom.
Significance of the fundamental freedoms outside the Directive
Irrespective of the Parent-Subsidiary Directive, a final burden of withholding tax on investment income may infringe the freedom of establishment or the free movement of capital. In a classic parent-subsidiary relationship, because of the level of participation, the freedom of establishment must generally be examined first. However, the basic considerations regarding the free movement of capital may be used to assess comparable burden effects.
Distributions by a German subsidiary corporation are generally subject to withholding tax on investment income, irrespective of whether they are made to a domestic or foreign parent company. What is decisive, however, is how the burden affects the recipient parent company.
In the case of a domestic parent company, income under § 20 Abs. 1 Nr. 1 and Nr. 2 EStG is generally excluded from the determination of income pursuant to § 8b Abs. 1 Satz 1 KStG (German Corporation Tax Act). At the same time, the withheld withholding tax on investment income may be credited or refunded insofar as the corporation tax payable is lower than the credit amount. Subject to special exclusion provisions, such as § 8b Abs. 4 KStG, the withholding tax deduction therefore does not lead to a final burden for a domestic parent company.
By contrast, in the case of an EU foreign parent company, a final burden may arise if § 43b EStG is not applied to investment income under § 20 Abs. 1 Nr. 2 EStG or to investment income under § 20 Abs. 1 Nr. 1 EStG accruing on the occasion of liquidation. A possible reduction of the withholding tax deduction under a double taxation treaty does not necessarily change this. The mere exercise of German withholding taxation rights may result in multiple taxation or economic double taxation.
Critical assessment of the restrictions in § 43b EStG
Exclusion under § 43b Abs. 1 Satz 4 EStG
§ 43b Abs. 1 Satz 4 EStG excludes investment income within the meaning of § 20 Abs. 1 Nr. 1 EStG from the benefit if it accrues on the occasion of the liquidation of the subsidiary. The Bundesfinanzhof did not apply this restriction in the case decided because the profits had already arisen before the start of liquidation and Art. 5 of the Parent-Subsidiary Directive does not provide for a corresponding exception.
This makes clear that the timing of the payment after the start of liquidation is not sufficient to deny relief under § 43b EStG. Rather, the decisive question is whether, from an economic perspective, the profits arose before dissolution.
Restriction to § 20 Abs. 1 Nr. 1 EStG
In addition, the restriction of § 43b Abs. 1 Satz 1 EStG to investment income under § 20 Abs. 1 Nr. 1 EStG must also be viewed critically. The legislative history of the provision suggests that this limitation is based on a transfer of the exception in Art. 4 of the Parent-Subsidiary Directive to the area of withholding tax. For a withholding tax rule, however, Art. 5 of the Directive is decisive.
It follows that receipts under § 20 Abs. 1 Nr. 2 EStG cannot simply be excluded from the relief regime as a matter of EU law. Art. 5 of the Parent-Subsidiary Directive contains precisely no express exception for liquidation distributions. This argues in favour of not excluding liquidation proceeds from the protection of the withholding tax exemption merely because of their classification under national law.
Equal treatment of domestic and foreign parent companies
A further aspect follows from the comparison with purely domestic situations. In the case of distributions by a domestic subsidiary to a domestic parent company, the withholding tax burden is regularly neutralised by credit or refund. § 8b Abs. 1 Satz 1 KStG does not distinguish according to whether income under § 20 Abs. 1 Nr. 1 EStG or under § 20 Abs. 1 Nr. 2 EStG is present.
If, by contrast, EU foreign parent companies are excluded from refunds in liquidation cases or are granted only limited relief, this may lead to unequal treatment. Such differentiation requires legally sustainable justifications under EU law. No such compelling reasons are apparent for the case groups considered here.
Key points for cross-border liquidation cases
The decision of the Bundesfinanzhof concerns a clearly defined set of facts: after the start of liquidation, profits were distributed that had arisen before the dissolution of the German subsidiary. For this constellation, § 43b Abs. 1 Satz 4 EStG does not apply according to the decision. The withheld and remitted withholding tax on investment income and the solidarity surcharge must be refunded in full if the other requirements of § 43b EStG are met.
Key points are:
- Profits generated before liquidation generally remain income under § 20 Abs. 1 Nr. 1 EStG when distributed at a later date.
- According to the BFH decision, this applies at least to profit distributions resolved during the liquidation period.
- The treatment of profits generated before dissolution that are only distributed as part of a final liquidation distribution was not decided by the Bundesfinanzhof.
- § 43b Abs. 1 Satz 4 EStG is not to be applied, in conformity with EU law, to retained profits distributed after the start of liquidation.
- Relief continues to require, in particular, a direct participation of at least 10% and an uninterrupted holding period of twelve months at the time the tax arises.
- Beyond the case decided, weighty arguments support a critical assessment of the restriction to investment income under § 20 Abs. 1 Nr. 1 EStG as well.
- In addition to the Parent-Subsidiary Directive, the freedom of establishment and the free movement of capital may be relevant for assessing the withholding tax burden.
Outlook for companies and investors
Judgment VIII R 8/24 strengthens the EU law perspective in cross-border distributions during the liquidation of a German subsidiary corporation. It limits the scope of § 43b Abs. 1 Satz 4 EStG, at least for distributions of profits generated before liquidation. At the same time, questions remain open, in particular regarding the treatment of final liquidation distributions and of receipts under § 20 Abs. 1 Nr. 2 EStG.
For internationally structured corporate groups, investors and high-net-worth individuals with participations held through corporations, the tax classification of such transactions may have considerable economic significance. The legal assessment regularly depends on the specific participation structure, the origin of the profits, the timing of the distribution and the requirements under EU law.
MTR Legal Rechtsanwälte advises clients on cross-border tax issues in connection with corporate participations, distributions and liquidations. If you have legal questions concerning withholding tax on investment income, withholding tax relief and EU law aspects, you can find further information at Legal advice in tax law.
