Federal Fiscal Court ruling: Refund of withholding taxes in the absence of German taxing rights

Collection of income taxes through withholding taxes

In many cases, income taxes are collected through withholding taxes for both taxpayers subject to resident and non-resident tax liability. The treasury can, through the tax assessments that must be filed regularly throughout the year (section 150(1) sentence 3 of the General Tax Code [Abgabenordnung-AO]) and the corresponding due date of the resulting claims, ensure early and consistent tax payments. In the form of the withholding agent (section 43 sentence 2), the treasury has, in addition to the taxpayer (section 43 sentence 1), another person from whom it can seek payment of the tax liability within the bounds of procedural law (e.g., for wage tax, section 38(3) sentence 1 of the Income Tax Act; section 42d).

In the case of resident taxation (section 1; section 1 of the Corporate Income Tax Act) due to the deduction of withholding tax on capital income, facts often arise during the tax year in which the relief provisions of section 3 no. 40 of the Income Tax Act or section 8b of the Corporate Income Tax Act are simply irrelevant (section 43(1) sentence 3 of the Income Tax Act), as well as the type of income earned (section 43(4)). The adjustment to the “partial income system” under section 3 no. 40 is then made as part of the tax assessment, in which section 8b of the Corporate Income Tax Act often results in a 95% exemption for distributions received by corporations from other corporations. The refund of taxes withheld in excess is then made long after they were withheld (section 36(2) of the Income Tax Act). In private tax assets – and with the exception of various cases (sentence 32d(2)) – section 43(5) sentence 1 results in a final withholding effect.

For private individuals, wage tax – as a very lucrative source of revenue for the treasury – is comprehensively mandated as a withholding tax on income from employment (sections 38 and following). It applies not only to taxpayers subject to resident tax liability but also to those subject to non-resident tax liability (e.g., section 38b(1) sentence 2 no. 1 letter b; section 39(2) sentence 2).

Refund of excess withholding tax 

However, without any substantive taxation (section 2(1) sentence one; section 2 of the Corporate Income Tax Act; section 49 of the Income Tax Act; section 2 of the Foreign Transactions Tax Act), there should be no withholding of withholding taxes at the expense of taxpayers subject to non-resident tax liability. Since these serve a protective function for the treasury, particularly in cases of non-resident taxation, they tend to be withheld more frequently than is justified under substantive law. In some cases, taxpayers subject to non-resident tax liability are granted a statutory right to assessment, which allows for the precise calculation of their income tax liability (e.g., section 50(2) sentence 2 no. 4 of the Income Tax Act). 

However, this option is contingent upon the nationality of a member state of the European Union or the European Economic Area; furthermore, the taxpayer subject to non-resident tax liability must have his or her place of residence or habitual abode within the territory of one of these states (section 50(2) sentence 7). In the context of such assessments, however, various tax reliefs are not granted or are granted only on a pro rata basis (section 50(1) sentence 4 and following), as well as joint filing (section 26(1) sentence 1). For corporations, for example, section 44a(9) provides an opportunity to adjust, at least on a pro rata basis, any excessive withholding of withholding tax on capital income.

In cases of excessive withholding of wage tax – in comparison to the provisions of Double Tax Treaties (“DTTs”) regarding “employment” (article 15 of the 2025 OECD Model Convention; article 14 of the 2026 German Model Treaty [Deutsche Verhandlungsgrundlage]) – the question arises as to how a taxpayer subject to non-resident tax liability can obtain a refund of the excess wage tax withheld. The employer may file an objection and a lawsuit against its (own) wage tax assessment, which is equivalent to a tax assessment subject to review (section 168 of the General Tax Code) (Federal Tax Court judgement of 21 Feb 2018, file ref. VII R 25/16, Federal Tax Gazette [Bundessteuerblatt-BStBl.] II 2018, p. 389, para. 11). Furthermore, according to established case law, the taxpayer has the option of a “third-party challenge” (Federal Tax Court judgement of 20 Nov 2018, file ref. VIII R 45/15, Federal Tax Gazette II 2019, p. 306, para. 10).

No refund under section 50d(1) sentence 2 of the Income Tax Act, as previously in force (anymore)

For the excess wage tax withheld in the fact pattern of the judgement with file ref. VI R 12/24, the sixth chamber of the Federal Tax Court has denied any claim for a refund in its entirety. Such a claim does not arise from section 37(2) sentence 1 of the General Tax Code, because the wage tax assessment is equivalent to a tax assessment subject to review (section 168 sentence 1) and thus constitutes the legal basis for the withholding. The plaintiff could have challenged this return on his own behalf or sought its amendment under section 164(2), but did not do so. His application for a refund, which was expressly based on section 37(2), could neither be interpreted as a challenge nor reinterpreted as such, since both are aimed at different legal consequences.

In such cases, case law had previously endorsed an analogous application of section 50d(1) sentence 2 of the Income Tax Act (old version) (Federal Tax Court judgement of 21 Oct 2009, file ref. I R 70/08, Federal Tax Gazette II 2012, p. 493). Section 50d(1) sentence 2 (old version) (now: section 50c(3) sentence 1) is tailored in its factual scope to capital income and remuneration within the meaning of section 50a and does not cover wage income. Unlike the first chamber of the Federal Tax Court, the sixth chamber of Federal Tax Court rejects the existence of an unintended regulatory gap as a prerequisite for analogical application: By challenging the wage tax assessment filed on his behalf, the employee has another reasonable option available to him for obtaining a tax refund. The legislature deliberately regulated only withholding tax on capital income in section 50d(1) sentence 2 (old version); a legal basis for a wage tax refund would have been obvious had the legislature intended it. Furthermore, the rules governing non-resident taxation and the finality of the wage tax assessment are on the same legal level, so that any priority would require special justification. 

A request for a ruling on a divergence under section 11(2), (3) of the Tax Court Code [Finanzgerichtsordnung-FGO] was unnecessary since, due to a change in the allocation of cases, the first chamber of the Federal Tax Court can no longer hear the matter.

Furthermore, the change in established case law, which the tax authority accepted despite adverse fiscal consequences (Federal Ministry of Finance Circular [Bundesministerium der Finanzen-BMF]  pf 27 Jun 2022, Federal Tax Gazette I 2022, p. 956), was justified in the opinion of the sixth chamber of the Federal Tax Court (Regarding the requirement that there must be “serious objective grounds”; most recently, Federal Tax Court judgement of 24 Mar 2026, file ref. VIII R 30/24).

Due to the far-reaching consequences in such cases, a transitional provision was included: The previous principles regarding the analogous application of section 50d(1) sentence 2 of the Income Tax Act (old version) in the aforementioned cases are to continue to apply for reasons of protection of legitimate expectations, provided that the taxpayer asserted the corresponding refund claims with the tax office by the end of the day on which the decision was published (9 Jul 2026).