The German federal parliament has passed a law to strengthen growth opportunities, investment and innovation as well as tax simplification and tax fairness, which is now in the mediation committee of the German federal parliament and the Federal Council. The law, abbreviated as the Growth Opportunities Act, contains a large number of major and minor legislative changes.
One of these proposed changes to the law affects foreign non-profit organizations. In the future, these organizations will be able to apply for a refund of the capital gains tax withheld and paid in Germany. The intention is to put foreign and domestic non-profit organizations, which already have the option of a tax refund, on an equal footing.
The most important facts in brief
The German federal parliament has passed an amendment to the law to allow foreign non-profit organizations to receive a refund of German capital gains tax. However, the requirements for this are strict and will probably almost only be fulfilled by non-profit organizations from another EU or EEA member state.
In Germany, the capital gains tax is a withholding tax. The debtor of the capital gains is generally obliged to withhold the capital gains
tax and remit it to the tax office. However, if the creditor of the capital gains is an organization that is tax-exempt in Germany due to the pursuit of public-benefit, charitable or religious purposes, no tax withholding is exceptionally required. If capital gains tax is nevertheless withheld, the tax-exempt organization can have it refunded.
These rules do not apply to foreign non-profit organizations. Consequently, capital gains tax must be withheld by the German debtor of the capital gains. The tax withheld has a settlement effect for the foreign non-profit organization and therefore results in a definitive tax burden.
The unequal treatment of domestic and foreign non-profit organizations is a violation of the free movement of capital. In order to eliminate this violation of European law, exemption from capital gains tax should also be possible for foreign non-profit organizations in the future.
The Growth Opportunities Act does not provide to extend the existing regulations for domestic non-profit organizations to foreign organizations as well. In particular, capital gains tax will continue to be withheld from the debtor of the capital gains. However, foreign non-profit organizations should be able to request a refund of the withheld and remitted capital gains tax and also retroactively in all cases that are still pending.
However, the capital gains tax should only be refunded if a number of conditions are met. In detail, these are the following:
- The creditor of the capital gains must be an organization that is subject to limited corporate income tax liability in Germany. For this, it must have its registered office and place of management abroad, but generate taxable income in Germany.
- The organization must also be exempt from corporate income tax in Germany due to the promotion of public-benefit, charitable or religious purposes.
- The registered office and management of the organization must be located in a member state of the European Union or in a state with which Germany has concluded an administrative assistance agreement and a recovery agreement.
- The organization must be subject to a tax liability comparable to unlimited corporate income tax liability in the state in which its place of management is located, without the possibility of choice.
- In the event of dividends and similar profit shares, the creditor of the capital gains must have a direct participation in the debtor’s share capital or nominal capital.
- If the creditor of the capital gains is resident outside the European Economic Area, the capital gains must not be related to direct investments. Direct investments exist in particular if the creditor of the capital gains has a direct or indirect participation in the debtor amounting to at least 10 percent.
- No other claim for refund or credit of capital gains tax may already exist in Germany or abroad.
Outlook and Legislative Process
The Federal Council did not approve the Growth Opportunities Act, which is now in the mediation committee. Even if the amendment to the law presented here is not criticized by the Federal Council, it remains to be seen whether the Growth Opportunities Act as a whole will be ratified this year and enter into force at the beginning of next year.
Especially for foreign non-profit organizations with their registered office and management in the European Union, the newly created possibility of refunding the capital gains tax paid seems to make investing in Germany more attractive. The German federal government expects the tax revenue to be reduced by EUR 850 million in 2024 only due to the refund option.
In contrast, the currently planned strict requirements for foreign non-profit organizations with registered offices and management outside the European Union will probably be too high in most cases. In particular, only very few states outside the European Union have a necessary administrative assistance and recovery agreement with Germany. If such an agreement exists, it must actually be implemented in practice.