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Federal Finance Court — Orbitax Tax News & Alerts
denies interest on refund of withholding tax

On 13 February 2008, a decision of the Federal Finance Court (Bundesfinanzhof) of 18 September 2007 was published. In that decision, the Court ruled that no interest is due on the refunded amount of withholding tax calculated by the Federal Tax Authorities.

(a) Facts. The case concerned a corporation (A) the legal seat and place of management of which was in the United Kingdom, and a German resident company (B), that arranged concerts in Germany. In 1997, A provided B with a band for various concerts in Germany. B withheld tax on the payments to A in accordance with the German Income Tax Act. A successfully applied for a refund of the withholding tax. However, it remained disputed whether A could claim interest on the refunded amount.

(b) Legal background. Under German income tax law, non-resident artists are subject to limited tax liability in Germany with regard to their German-source income. The tax is levied at source by way of withholding on the gross amount, without deductions for business expenses. A withholding tax return must be filed, indicating the taxable base and the amount of tax withheld. The withholding tax represents a final tax in full settlement of the tax liability, unless the income is effectively connected with a permanent establishment.

(c) Decision. The Federal Finance Court denied interest on the refunded amount of withholding tax under Sec. 233a AO (General Tax Code), based on the historical interpretation and wording of the law. Sec. 233a AO covers only interest on tax refunds and additional claims with regard to the assessment of income tax, corporate income tax, VAT and municipal business tax. Sec. 233a(1) Sentence 2 AO states that withholding taxes are not covered.

The Court noted that the rationale of Sec. 233a AO is to compensate for cash-flow advantages which are contrary to the principle of equability of taxation. This rationale justifies the limitation of the scope of applicability of Sec. 233a AO by excluding withholding taxes. The Court emphasized that the legislator is not obliged to provide for comprehensive interest payments on all kinds of refund claims.

The underlying case concerns a withholding tax in the sense of Sec. 233a(1) Sentence 2 AO. The withholding tax levied on A is a final tax in full settlement of A's tax liability. The Court emphasized that the withholding procedure does not become an assessment procedure by the mere claiming of a refund. The refund procedure for non-residents under Sec. 50(5)of the German Income Tax Act is limited to the scope of the withholding procedure.

Referring to the ECJ decision Scorpio, the Court concluded that the denial of interest on the refunded withholding tax is compatible with EC law.