Sooner or later, the German subsidiary is expected to send money back to its parent. The classic route is a dividend. Germany first withholds tax on it, even where a double taxation treaty (DBA) or EU law allows less. The difference is either exempted in advance or refunded later. This article sets out the mechanics, the deadlines and the test on which some holding structures fail.
How a dividend is paid out
A distribution starts with resolutions. The shareholders adopt the annual financial statements and decide how the profit is to be used (§ 46 Nr. 1 GmbHG). Only what is not needed to maintain the share capital may be distributed (§ 30 Abs. 1 GmbHG).
When the GmbH then pays out, it withholds investment income tax (Kapitalertragsteuer) at 25% (§ 43 Abs. 1 Satz 1 Nr. 1, § 43a Abs. 1 Nr. 1 EStG). On top comes the solidarity surcharge of 5.5% of that tax (§§ 3, 4 SolZG). Together, that is 26.375% of the gross dividend. The GmbH pays the tax over on behalf of the parent company at the moment the dividend is received (§ 44 Abs. 1 EStG). If it withholds too little, it is liable (§ 44 Abs. 5 EStG). For the foreign parent, this generally settles German corporation tax on the dividend in full (§ 32 Abs. 1 Nr. 2 KStG).
What is left at the end
The law offers several ways to reduce the burden. Worked example for a gross dividend of €100,000:
| Scenario | Legal basis | German tax |
|---|---|---|
| No relief | § 43a EStG, § 4 SolZG | €25,000 withholding tax and €1,375 solidarity surcharge |
| Foreign corporation, no further relief | § 44a Abs. 9 EStG | Two fifths of the withholding tax are refunded; €15,000 withholding tax remains |
| Parent company in China, holding at least 25% directly | Art. 10 Abs. 2 DBA China | No more than 5%, i.e. €5,000 |
| Parent company in the EU, holding at least 10% for twelve months | § 43b EStG | No withholding tax |
The treaty with China generally allows 10%; the 5% rate requires a company that directly holds at least 25% of the capital (Art. 10 Abs. 2 DBA China). The Parent-Subsidiary Directive, implemented in § 43b EStG, applies only to parent companies in the EU. For a parent in China, the USA or Türkiye, the relevant treaty remains the benchmark. How treaties work in principle is explained in our article Understanding double taxation treaties, and country-specific set-ups in our article on Holding structures for international investors. Always take the exact rate from the treaty text itself.
Exemption or refund: § 50c EStG
The rule: the GmbH must initially withhold the full tax, even if a treaty or § 43b EStG provides for less. It cannot rely on the parent company's entitlements itself (§ 50c Abs. 1 EStG). Relief is granted by the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt). There are two routes.
- Advance exemption: On application, the BZSt certifies that the treaty or the directive applies. The GmbH then withholds only the reduced rate (§ 50c Abs. 2 Nr. 1 EStG). In treaty cases, this requires a corporation that is taxable in its home country and holds at least 10% directly. The certificate is valid for a maximum of five years from receipt of the application. The BZSt decides within three months once all supporting evidence is in.
- Refund afterwards: The parent company applies to reclaim the overpaid tax (§ 50c Abs. 3 EStG). The deadline is four years from the end of the year in which the dividend was received. The GmbH's tax certificate is required.
Both applications are filed electronically via the official interface. The parent company proves its residence with a certificate from its own tax authority (§ 50c Abs. 5 EStG). If you plan to distribute regularly, apply for the exemption before the first payment. That protects your liquidity.
The substance test: § 50d Abs. 3 EStG
If an intermediate company sits between the German subsidiary and the group parent, Germany examines who stands behind that company and what it actually does.
“A corporation, association of persons or pool of assets is not entitled, on the basis of a double taxation treaty, to relief from investment income tax and from withholding under § 50a to the extent that it is held by persons […] who would not be entitled to that relief if they earned the income directly, and the source of income has no substantial connection with an economic activity of that corporation […]” (our translation)
§ 50d Abs. 3 Satz 1 EStG
Merely holding and passing on dividends is expressly not an economic activity. The company can avert this if it shows that none of the main purposes of its involvement is a tax advantage, or if its shares are regularly traded on a recognised stock exchange (§ 50d Abs. 3 Satz 2 EStG). The same test applies to the Parent-Subsidiary Directive (§ 43b Abs. 1 EStG) and to the two-fifths refund (§ 44a Abs. 9 EStG). What substance means in practice is described in our article on economic substance.
“The decisive question is not which country has the lowest rate. What matters is whether the company receiving the dividend genuinely does something there. We check that before the structure is in place, not when the first refund claim is filed.”
Fatma Tabak, tax advisor · TABAK Steuerberatung
Alternatives to a dividend
- Interest on a shareholder loan: Interest on a fixed-rate loan from the foreign shareholder is generally not German-source income; this changes, for example, where the loan is secured by German real estate (§ 49 Abs. 1 Nr. 5 Buchst. c EStG). For a GmbH, the interest barrier caps the deduction at 30% of tax EBITDA; it does not apply if net interest expense is below €3 million (§ 4h EStG, § 8a KStG). For trade tax, a quarter of the interest is added back to the extent that the total exceeds €200,000 (§ 8 Nr. 1 GewStG). The interest rate must stand up to the arm's length test (§ 1 AStG).
- Royalties to the parent: On royalties, the GmbH withholds 15% (§ 50a Abs. 1 Nr. 3, Abs. 2 EStG). The treaty with China caps the withholding tax at 10% of the gross amount, and for the use of equipment at 10% of an adjusted amount (Art. 12 DBA China). Relief again runs through § 50c EStG.
- Intra-group services: Management and service fees are possible if the service and the price are at arm's length. The documentation requirements are explained in our article on transfer pricing, and the sales set-up in our article Produce Abroad, Sell in Germany.
- Returning capital contributions: Capital paid in beyond the share capital is recorded by the GmbH in its tax contribution account (steuerliches Einlagekonto, § 27 KStG). Distributions deemed to be paid out of this account are not taxable dividends (§ 20 Abs. 1 Nr. 1 EStG).
- Retaining profits: The corporation tax rate falls gradually from 15% until 2027 to 10% from 2032 (§ 23 KStG). Profits the subsidiary reinvests in Germany therefore become cheaper. Our article on the investment booster runs the numbers.
The government draft of 30 September 2026 (BT-Drucksache 21/8283) would raise the exemption threshold in § 50c Abs. 2 Satz 1 Nr. 2 EStG from €10,000 to €100,000 per creditor and calendar year. It concerns royalty payments under § 50a EStG, not dividends. Up to this threshold, the GmbH may refrain from withholding without a prior application if a treaty precludes German taxation. Whether a mere rate cap, as in the treaty with China, is sufficient for this is something we assess case by case. The change is intended to apply to payments from 2027. The law has not yet been passed; the hearing in the Finance Committee is scheduled for 2 November 2026.
A typical case
Suppose a Chinese industrial group holds 100% of a German GmbH. The parent applies to the BZSt for an exemption certificate at 5%. The GmbH then withholds only that rate on every distribution. If a holding company with no activity of its own sits in between, the BZSt examines under § 50d Abs. 3 EStG whether relief is still available. The German side is only half the calculation. How the home country taxes the dividend and credits the German tax, we clarify with partner firms in more than 20 countries; more on this in our article Tax Advice Across Borders. The GmbH must also report payments to non-residents above €50,000 to the Bundesbank (§ 67 AWV, see AWV Reporting Obligations).
Frequently Asked Questions
What is the withholding tax on dividends from a German GmbH?
The GmbH withholds 25% investment income tax plus a 5.5% solidarity surcharge on it, 26.375% in total (§ 43a EStG, § 4 SolZG). Foreign corporations can apply for relief under a treaty, under § 43b EStG or under § 44a Abs. 9 EStG.
Which is better: exemption or refund?
For regular distributions, usually the exemption, because only the reduced rate is then withheld (§ 50c Abs. 2 EStG). It is valid for a maximum of five years. The refund (§ 50c Abs. 3 EStG) recovers overpaid tax after the event.
What is the deadline for a refund claim?
Four years from the end of the calendar year in which the dividend was received. The deadline does not end earlier than one year after the tax was paid, nor before any longer period set in the treaty (§ 50c Abs. 3 EStG).
Does the Parent-Subsidiary Directive also apply to parent companies outside the EU?
No. § 43b EStG requires a parent company in the EU (or an EU permanent establishment) with a direct holding of at least 10% for twelve months. For other countries, the relevant double taxation treaty applies.
Does the Annual Tax Act 2026 change the withholding tax on dividends?
The planned increase of the exemption threshold to €100,000 concerns royalty payments, not dividends. As of October 2026, the law is a government draft (BT-Drucksache 21/8283).
Sources
- § 43a EStG – assessment of investment income tax
- § 44a EStG – non-withholding and refund (Abs. 9)
- § 43b EStG – Parent-Subsidiary Directive
- § 50c EStG – relief from withholding tax
- § 50d EStG – anti-treaty shopping (Abs. 3)
- § 50a EStG – withholding tax on royalties
- § 4 SolZG – surcharge rate
- BMF – Germany–China double taxation treaty of 28 March 2014
- BT-Drucksache 21/8283 – draft Annual Tax Act 2026
- Bundestag – hearing on the Annual Tax Act 2026
More than 20 years advising entrepreneurs, investors and family businesses. Reserved tax services are provided by our partner tax firm, TABAK Steuerberatung.
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