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German Treaty Favors S Corporations

In its decision on June 26, 2013, the German Federal Fiscal Court (“the Court”), cited I R 48/12, IStR 2013, p.880, overruled a lower court case and found in favor of the taxpayer. Using logic similar to Canada Revenue Agency’s established position that an S corporation is a U.S. resident corporation that has elected not to be subject to tax, the Court concluded that an S corporation holding at least 10 percent interest in a German GmbH suffers withholding on dividends from the GmbH at a rate not to exceed 5 percent. Were the treaty not to apply, the rate of withholding tax would be 26.375 percent. The case, however, did not address the potential applicability of the zero percent rate because this fact pattern dealt with an S corporation shareholder that held only 50 percent of the subsidiary GmbH.

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