Berlin-Brandenburg Tax Court clarifies that US withholding tax can be credited against trade tax

Why is this relevant? 

For income and corporate income tax, there are clear rules regarding the credit of foreign taxes with the aim of avoiding double taxation. For trade tax, the law does not contain any explicit rule on crediting. The tax authorities therefore rigorously reject this kind of crediting. The tax court, however, considered this a gap in the law and allowed amounts to be credited using the assessment notice regarding the tax base for trade tax purposes.

A brief summary of the case
In November 2020, a German GmbH (a corporation under German law) acquired around 26 per cent of a US corporation and in December 2020 already received a dividend. The US tax authorities retained 5 per cent withholding tax on this. The GmbH wanted to have this withholding tax taken into account in Germany to avoid a double tax burden.

Under corporation tax law, dividends (as in this case) are often highly privileged under section 8b of the German Corporate Income Tax Act [“Körperschaftssteuergesetz–KStG”] (put simply, they are up to 95 per cent tax-free). For trade tax, the hurdle for an exemption is higher, starting at investments of at least 15 per cent held at the start of the assessment period. These circumstances therefore led to a trade tax burden in Germany and thus to double taxation. The tax office refused to allow the US withholding tax to be credited against the trade tax.

The key statements from the tax court judgement
Result: Berlin-Brandenburg Fiscal Court held that the US withholding tax is to be credited against the trade tax. It is to be taken into account by means of a determination in the trade tax assessment notice.

The court justified this with the following main points:

• The DTT Germany-USA also includes trade tax. Therefore, crediting is not “restricted” to corporate income tax.
• The intent of the DTT is to avoid double taxation. If tax is withheld abroad and trade tax is also due in Germany, a double burden should not occur.
• The lack of a provision on crediting in the Trade Tax Act is a gap in the law. The tax court held that the legislature had not consciously “excluded” trade tax here.
• Consequence: Analogous application of the logic of crediting. The foreign withholding tax may therefore be credited against the trade tax within the boundaries of the DTT.

What does this mean in practice?

The judgement may be of particular importance to you if you receive US dividends on which tax is withheld in the US and the dividend does not remain completely “neutral” for trade tax in Germany (e.g. due to formal conditions). In such cases, crediting the withholding tax can make all the difference whether this causes noticeable double taxation or not.

Recommendation: Particularly check dividends, royalties and interest income from the USA, Canada and other countries (where the relevant double taxation treaty allows taxes to be credited and trade tax is not explicitly excluded): 

(1) whether and what amount of tax was withheld

(2) whether the income is actually liable to trade tax and

(3) whether crediting should be applied for or kept open in the assessment notice for trade tax purposes (e.g. by lodging an objection and applying for the procedure to be suspended).

Outlook: The fiscal court gave leave to appeal to the Federal Tax Court (“Bundesfinanzhof”). The Federal Fiscal Court’s decision remains to be seen.

Take-away for clients: The Berlin-Brandenburg Tax Court has strengthened the position of taxpayers – US withholding tax does not automatically have to be forfeited when dividends are liable for trade tax but in the court’s view may be credited against it. Until the Federal Tax Court reaches a decision, it is recommended to critically review relevant matters. We’ll be glad to advise you in this matter.

Current advisory news in brief 

Federal Fiscal Court judgement – actual performance of a profit and loss transfer agreement
In a recent judgement, the Federal Tax Court (judgement of 5/11/2025, file ref. I R 37/22) specified the requirements for the actual performance of a profit and loss transfer agreement and clarified that just keeping accounts that are not fulfilled soon after is not sufficient. In particular, profit and loss transfer agreements must be recognised correctly in the accounting and fulfilled within 12 months of becoming due at the latest. Otherwise, the income tax group as a whole will collapse, which will have substantial consequences for tax. 

Nuremberg Fiscal Court – constitutionality of the prohibition on deducting half of supervisory board remuneration
The Nuremberg Tax Court decided (judgement of 30/09/2025, file ref. 1 K 273/24) that the prohibition on deducting half of the supervisory board remuneration in section 10 no. 4 of the Corporation Tax Act [“Körperschaftssteuergesetz–KStG”] is constitutional. This is neither prohibited double taxation nor an infringement of the objective net principle of taxation or the principle of equity before the law because the rule typically takes into account the interests of both shareholders and the company. The action was rejected; leave was given to appeal to the Federal Tax Court and such an appeal was indeed lodged. It is advisable to keep assessment notices open (including for advisory board remuneration at a GmbH) until a decision has been made.