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Crediting foreign withholding tax on capital gains against domestic (German) trade tax

The German Trade Tax Act does not have any separate provisions relating to the crediting of foreign withholding tax on capital gains. However, crediting against German trade tax could ensue from the respective double taxation agreement (DTA) with a foreign country. Recently, this was the conclusion of the Hesse tax court (Finanzgericht Hessen, FG).

In its ruling from 26.8.2020 (case reference: 8 K 1860/16), the FG affirmed that Canadian withholding tax on capital gains could be credited against domestic (German) trade tax. Deducting Canadian withholding tax would result in double taxation because Germany and Canada levy a similar type of tax on the same tax-payer for the same taxable income and period. It was the view of the FG that the DTA with Canada provides for the crediting of tax paid in Canada and does not differentiate here between crediting against, firstly, corporation tax and income tax, and, secondly, trade tax. Neither is the crediting hampered by the fact that, unlike the German Income Tax Act/German Corporation Tax Act, the German Trade Tax Act does not contain any provisions on the crediting of foreign tax. Therefore, whether or not foreign withholding tax can be credited against domestic (German) trade tax depends on the terms of the DTA. 

Please note: An appeal has been lodged against the FG’s decision with the Federal Fiscal Court (case reference: I R 8/21)and that is why comparable cases can be kept open through objections that make reference to the pending court case. 

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