No Change in the Beneficial Owner in Relation to Withholding Tax Refund Claims for US S-Corporations

Legal Insights Germany

July 23, 2026

In its ruling of March 11, 2026, the German Federal Fiscal Court (BFH) decided that a US S-corporation has a refund claim pursuant to the participation-exemption rules in Article 10 (3) of the DTT with the United States, notwithstanding its transparent taxation in the United States. The provision in Section 50d (1) sent. 11 of the Income Tax Act (EStG) (in its former version) does not contradict this.

Facts of the Case

The claimant was a US corporation which had opted to be treated as an “S-corporation” in the United States and was not subject to US corporation tax.

In 2013, the S-corporation received a dividend from its wholly owned subsidiary, a German-based GmbH, which was subject to 25% German withholding tax plus solidarity surcharge. Subsequently, the S-corporation applied for a full refund of German withholding tax “on behalf of its shareholders.”

The German Central Tax Office (BZSt) granted only a reduction to 15% pursuant to Section 50d (1) sent. 11 of the EStG (in its former version): According to this provision, the shareholders behind the S-corporation were to be regarded as the beneficial owners of the dividend, with the consequence that the participation-exemption rules (Schachtelprivileg) in Article 10 (3) of the DTT between the US and Germany (DTT-US/Ger) do not apply and only a reduction to 15% could be considered. The Fiscal Court of Cologne upheld the appeal against this decision and ordered the BZSt to make a full refund; subsequently, the BZSt filed an appeal against this decision to the BFH.

Decision of the German Federal Fiscal Court

The BFH upheld the decision of the Fiscal Court: Pursuant to the BFH, the US S-corporation is not a company resident in the US within the meaning of Article 4 of the DTT-US/Ger due to its option for corporate tax transparency in the US.

Notwithstanding this, the provision in Article 1 (7) of the DTT-US/Ger stipulates that dividend payments are deemed to have been received from a company resident in the US, provided that persons resident in the US hold a participation in this company pursuant to the BFH.

Further, Section 50d (1) sent. 11 EStG (in its former version) does not change such classification according to the DTT-US/Ger. The provision rather requires that a claim for a treaty-based refund has already occurred. This is based on the fact that the dividend payments are deemed to have been received by the S-corporation pursuant to Article 1 (7) of the DTT-US/Ger. According to this, the S-corporation is, in material law, entitled to the claim under Article 10 (3) of the DTT-US/Ger; in procedural law, however, this claim must be enforced by the shareholders to whom the income was attributed in the US; in the view of the BFH, the S-corporation’s application “on behalf of its shareholders” was sufficient for this purpose.

Conclusion

This ruling is significant in everyday practice, as the previous provision in Section 50d (1) sent. 11 EStG (in its former version) is now continued in Section 50d (11a) EStG. A reduction in the right to refund under a double taxation treaty solely on the grounds of transparent taxation in the country of residence is therefore unlikely to be possible any longer, also pursuant to Section 50d (11a) EStG. When submitting an application, however, it should be clearly apparent in whose name respectively on whose behalf the claim is being made.

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No Change in the Beneficial Owner in Relation to Withholding Tax Refund Claims for US S-Corporations

Legal Insights Germany

Facts of the Case

Decision of the German Federal Fiscal Court

Conclusion

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