Congress allowed the reduction to take effect retroactively to 2007. As a result, U.S. and German companies that received inter-company dividends during 2007, on which the five percent rate of withholding was applied, may be eligible for a refund of the taxes withheld.
The U.S.-German protocol entered into force Dec. 28, 2007, and provides for a zero percent withholding tax in certain circumstances. To be eligible for the zero percent rate, the company receiving the dividend must own at least 80 percent of the voting power of the payor corporation, and must have owned such corporation for at least 12 months from the date of the receipt of dividend.
In addition, the company receiving the dividend must qualify under the anti-treaty shopping provisions of the treaty (i.e., the Limitations of Benefits provisions under Article 28), summarized as:
- The public trading test;
- The ownership and base erosion test and active trade or business test;
- The derivative benefits test; or
- Receive a favorable determination from the competent authority with respect to the zero-rate provision.
As qualification under the Limitation of Benefits provisions is specific to facts and circumstances, it is advisable to undertake a thorough analysis in determining whether the zero percent rate of withholding may apply.
If the zero percent rate does in fact apply and taxes have been over-withheld in 2007, there are various mechanisms (whether in the U.S. or Germany) to apply for a refund of the over-withheld tax.
For example, a U.S. subsidiary that over-withheld and made a deposit of the tax may be eligible to adjust the over-withheld amount either under a reimbursement procedure or under a set-off procedure. Alternatively, a refund of the amount over-withheld can be claimed by the German parent by filing a U.S. tax return.
If amounts were over-withheld in Germany, the U.S. parent must file an "Application for Refund of German Withholding Tax" with the German tax authorities (Bundesamt für Finanzen), with supporting documentation.
If a business can benefit from the new U.S.-Germany treaty dividend withholding rate, both retroactively to 2007 and prospectively, we recommend analyzing whether benefits from the reduction can be captured (in the form of a refund) or planning future intercompany distributions accordingly.