Interest on withholding tax refunds in cases of incorrect application of a double tax treaty

Summary

The claimant, an Austrian bank, had received payments from profit participation certificates issued by German banks between 2003 and 2008, on which withholding tax and solidarity surcharge had been withheld. The refund was initially refused on the grounds of a German taxation right under Article 11 para. 2 of the Austria-Germany Double Taxation Agreement. 

After the European Court of Justice (ECJ) subsequently ruled in a similar case that such profit-sharing certificate payments did not fall under Article 11 para. 2 of the Austria-Germany Double Taxation Agreement, the tax authorities refunded the amounts withheld in 2019. The issue of interest on this refund—which is not actually provided for under German law—remained in dispute. 

The Cologne Fiscal Court partially upheld the claim. Under national law, there is, in principle, no provision for interest on these refunded amounts. However, the court held that the claim arose directly from EU law in this case, as the tax authorities had implemented the relief provisions in breach of EU law. 

The decisive factor for the court was that the claimant had been denied the refund for many years despite having submitted complete applications. Although this was merely a misapplication of a bilateral double taxation agreement (DTA) and thus not a matter of EU law, the court held that, on the basis of the case law of the Court of Justice of the European Union (CJEU), and in view of the positive effect that mitigating double taxation has on the functioning of the European Single Market, there was an objectively ascertainable link to the subject matter of the EU Treaties.

In the court’s view, the interest period begins six months after the full receipt of the refund applications by the competent tax authority. For periods up to December 31, 2018, an interest rate of 6% p.a. applies; from January 1, 2019, the court applies the reduced interest rate of 1.8% p.a. (in each case analogous to the general German provisions). 

Key new aspect and practical implications

The key new aspect of the decision lies in the classification of an incorrect application of a double taxation agreement under EU law. The Cologne Fiscal Court acknowledges that a double taxation agreement is not in itself EU law. However, in this specific case, it considers the enforcement to be contrary to EU law due to the link to the single market and the long-standing withholding of the relief. 

This ruling may therefore serve as an important basis for arguments by taxpayers in cases involving delayed withholding tax and DTA refunds. This applies in particular where a refund has been withheld for an extended period due to an assessment under the DTA that was subsequently found to be incorrect. Given the sometimes very long processing times at the Federal Central Tax Office (FCTO), this is unfortunately a highly relevant scenario in practice. In comparable cases, it should be examined whether, in addition to the claim for a refund, interest on the refund under EU law can also be claimed. 

It should be noted, however, that the court does not consider a general entitlement to interest to exist for every error under a DTA. The court also rejected a more far-reaching claim based on the EU free movement of capital. The entitlement to interest is therefore likely to be limited to taxpayers from other EU member states who are entitled to a refund. As an appeal has been allowed, clarification from the BFH is still pending (case no. VIII R 10/26).