On 25 October 2017, the German Federal Tax Court (decision dated 31 May 2017) ruled in favor of foreign shareholders selling shares in a German corporation. Capital gains realized upon sale of shares in a German resident corporation by non-resident corporate shareholders should be 100% tax-exempt instead of only 95%. The Court held that the 5% add-back only applies when a company has a German business as it relates to non-deductible business expense that cannot be taken into account when the taxpayer does not have a German business.
While the decision provides relief from the effective 5% tax burden, it remains to be seen how the German tax authorities and legislature will react to the decision. It should be noted that some of Germany’s double tax treaties provide for the full exemption from a capital gain on sale of shares in a German corporation by corporate residents of the other contracting state.
