The German Federal Fiscal Court (BFH) delivered its conclusive ruling in the L Fund case (I R 23/23), echoing the earlier European Court of Justice (ECJ) decision on 27 April 2023 (C-537/20). The BFH’s judgment, dated 11 October 2023 and published on 2 February 2024, signifies a notable development in tax jurisprudence as it aligns with the Court of Justice of the European Union’s (CJEU) interpretation of Article 63 of the Treaty on the Functioning of the European Union (TFEU).
The BFH ruled that excluding foreign specialised real property funds from a German tax exemption, exclusive to domestic counterparts, violates the free movement of capital, emphasising non-discrimination between domestic and foreign real estate funds. The recent BFH decision holds significant consequences for foreign investment funds that faced German taxation on their income from German investments before 1 January 2018.
The legislation, as applied to the German property fund in this instance, extends to all German investment funds and is not limited to property funds. Consequently, this judgement holds favourable implications for the ECJ reclaim applications of foreign investment funds covering the period from 2004 to 2017.
L Fund, a specialised property fund established under Luxembourg law, found itself embroiled in a tax dispute with the German Tax Authorities. Generating income from German real estate rentals and sales between 2008 and 2010, L Fund filed corporate income tax returns in July 2013, claiming that it was not liable for corporate income tax in Germany. Disagreeing with this assertion, the German Tax Authorities issued corporate income tax assessments for the respective years.
Following an unsuccessful outcome in the administrative objection procedure, concluded in 2014, L Fund pursued an appeal to the Finance Court of Münster. The court, in its judgment in April 2017, ruled in favour of the German Tax Authorities. Upon L Fund’s appeal to the BFH, the court sought guidance from the CJEU in October 2020. In April 2023, the CJEU determined that resident and non-resident specialised property funds are in objectively comparable situations, as the German legislation’s distinction is based solely on the funds’ tax residence and, consequently, referred the case back to the BFH for a final decision. For further information regarding the L Fund case, please refer to our previous article.
The recent ruling by the BFH solidifies its stance on a Luxembourg Fonds Commun de Placement (FCP), affirming its classification as a corporate taxpayer comparable to a German investment fund. This determination is based on the BFH’s well-established legal precedent in the classification of foreign legal entities under German tax law, evaluating the laws applicable to the foreign entity and its actual structure against German law criteria. The BFH thus emphasises the FCP’s right to challenge discriminatory treatment, asserting itself as the claimant, separate from the fund investor. The judgment clarifies that liability for corporate tax is contingent on the foreign entity’s similarity to a German corporate tax entity, regardless of its legal status under foreign law.
Through a reinterpretation of Section 11(1) of the German Investment Tax Act 2004, the BFH has extended full tax exemption to all investment funds, irrespective of their tax residency. This aligns the decision with the principles outlined in Article 63 of the TFEU. The BFH emphasised that tax exemption for the fund is independent of investor-level taxation, despite objections from the Federal Ministry of Finance.
The BFH granted a favourable verdict on the appeal made by the L Fund, mandating tax exemption for the L Fund in alignment with Section 11(1) of the German Investment Tax Act 2004. The ruling stems from the court’s perspective that subjecting these funds to German taxation is both prejudiced and unwarranted, noting the disparity with comparable German funds currently enjoying tax exemption.
The BFH’s alignment with the CJEU’s legal interpretation on the treatment of foreign investment funds is promising for foreign investors. The decision rendered on 11 October 2023 signals a tendency of the German Federal Fiscal Court to employ substantive arguments over formal ones, which, in a broader context, is considered advantageous.
Given the absence of differentiation of sources of income within Section 11(1) of the German Investment Tax Act 2004, similar arguments can be used in cases pertaining to German withholding taxes imposed on dividends distributed by German corporations to foreign investment funds from 2004 to 2017.
Pending ECJ refund applications, falling within the applicable four-year statute of limitations, are likely to benefit from this judgement. The BFH’s judgement suggest promising prospects for pending ECJ refund applications by foreign investment funds that incurred German withholding tax on their dividend income before 2018.
It is important to monitor the correspondence received from the German Tax Authorities to ensure adherence to objection filing deadlines and, where necessary, initiate court proceedings.
For further insights into the implications of the recent BFH ruling on your German ECJ reclaims, we recommend reaching out to WTax’s regional specialists.