The German subsidiary within the group
Incorporation is the smaller part. What comes afterwards — distributions, transfer pricing, funding — decides how much of the profit actually reaches the parent. This page assumes a subsidiary; on choosing the form see subsidiary or branch.
What is withheld when the subsidiary distributes profit?
To begin with, 26.375% — 25% withholding tax under § 43a (1) no. 1 of the Income Tax Act plus the 5.5% solidarity surcharge on top of it. That is the statutory starting point, not the final figure: it can almost always be reduced, often to nil. But not by itself.
The order of events matters. The subsidiary must withhold and remit as long as no relief is in place. Anyone who becomes active only after the distribution has to reclaim the money through a refund procedure — which takes time and ties up liquidity the group needs elsewhere.
Parent inside the EU
No withholding tax. § 43b of the Income Tax Act implements the Parent-Subsidiary Directive: the parent must hold at least 10% of the subsidiary's capital directly and must have held it continuously for 12 months.
The twelve-month period is where this trips up in practice. It need not have expired at the time of the distribution, but it does have to be demonstrated — and a newly incorporated subsidiary simply does not meet it yet.
Parent in Switzerland
Switzerland is not in the EU, but it is not an ordinary third country either: alongside the double tax treaty there is the agreement between the EU and Switzerland, which also provides a nil rate for substantial corporate holdings — on thresholds that differ from § 43b. Which basis is more favourable in a given case is something we check in advance; for a firm in Munich this is the most frequent cross-border case of all.
Parent in a third country
Then the double tax treaty with the parent's country of residence applies. Almost every treaty reduces the rate considerably for corporate holdings, frequently in tiers by size of holding. There is no single rate, and a table showing one figure per country would be misleading — what governs is the dividend article of the treaty in question and the minimum holding it specifies.
Where there is no treaty at all, the full amount is withheld.
The treaties with Russia and Belarus are suspended (Federal Ministry of Finance letter of 7 January 2026). A parent resident there can no longer rely on them.
How the relief is obtained
Through the Federal Central Tax Office (BZSt), by one of two routes — and the first is clearly preferable to the second.
| Exemption in advance | Refund afterwards | |
|---|---|---|
| Legal basis | § 50c (2) Income Tax Act | § 50c (3) Income Tax Act |
| When | before the distribution | after tax has been withheld |
| Effect | the subsidiary withholds nothing | the money comes back |
| Duration | decision within 3 months of complete documents | a procedure, with no statutory deadline |
| Validity / time limit | certificate up to 5 years | claim within 4 years of the end of the year of receipt |
| Liquidity | stays within the group | sits with the tax office until refunded |
The exemption certificate is valid for up to 5 years and at the earliest from the day the application arrives — it does not help retroactively. Together with the 3 months of processing time this means: anyone planning a fourth-quarter distribution files in the summer, not in November.
Transfer pricing
As soon as anything moves between parent and subsidiary — goods, services, licences, loans, management charges — the price has to match what unrelated parties would have agreed. And that has to be documented before anyone asks for it.
§ 90 (3) of the Fiscal Code requires three components: a transaction matrix giving an overview of the transactions, a factual record of the business relationships, and an arm's-length analysis setting out why the prices stand up.
A master file covering the group's worldwide activity is added only where turnover in the preceding financial year exceeded €100,000,000. Mid-sized subsidiaries are generally not affected.
The deadline that catches people out
On request, the records must be produced within 30 days (§ 90 (4) Fiscal Code). In a tax audit the transaction matrix and the master file must be filed without being asked at all, within 30 days of notification of the audit order.
In that time a documentation worthy of the name cannot be produced — it can only be retrieved. Those who maintain it as they go have no difficulty here; those who do not end up negotiating over estimates.
Funding: equity or a loan from the parent
A shareholder loan is more flexible than share capital, and interest reduces the subsidiary's profit. Which is precisely why the legislation looks closely at it.
The interest barrier in § 4h of the Income Tax Act allows net interest expense to be deducted only up to 30% of tax EBITDA. Below that sits an exemption threshold: where net interest expense is less than €3,000,000, the rule does not apply at all. For most subsidiaries of mid-sized groups that is the figure that matters — they stay below it.
Independently of that, the interest rate has to be at arm's length. If it is not, the difference is a hidden profit distribution — and withholding tax falls due on it, this time without anyone having resolved to distribute anything.
Tax grouping — and why it often does not work
A tax group attributes the subsidiary's result to the controlling company, so that profits and losses within the group offset each other. For that, § 14 of the Corporation Tax Act requires a profit and loss transfer agreement covering the entire profit, concluded for at least 5 years, and a majority of the voting rights from the beginning of the financial year.
For a foreign group the obstacle is a different one: the foreign parent cannot simply be the controlling company. The shareholding has to be attributable to a domestic business. Without a German permanent establishment or a German intermediate holding company, tax grouping is therefore usually out of reach — and the subsidiary's losses stay where they arose.
What we take on
- Applying to the Federal Central Tax Office for exemption, in good time before the planned distribution
- Refund claims where tax has already been withheld
- Checking which basis is more favourable — § 43b, the treaty, or both side by side
- Transfer pricing documentation: transaction matrix, factual record and arm's-length analysis
- Reviewing group funding against the interest barrier and the arm's-length standard
- Ongoing bookkeeping, payroll, financial statements and returns for the subsidiary
- Support during a tax audit
Frequently asked questions
How much withholding tax applies when a German subsidiary distributes profit to its foreign parent?
By statute 26.375% — 25% withholding tax under § 43a (1) no. 1 of the Income Tax Act plus the 5.5% solidarity surcharge on top. For parents inside the EU the rate drops to nil under § 43b where the holding is at least 10% and has existed continuously for 12 months. For parents in third countries the rate follows the double tax treaty.
Is the relief granted automatically?
No. Without an exemption certificate the subsidiary has to withhold and remit, even where no tax would be due in substance. The certificate must be applied for at the Federal Central Tax Office; it takes effect at the earliest on the day the application arrives and never retroactively.
How long does an exemption certificate take and how long is it valid?
The Federal Central Tax Office decides within 3 months of receiving all documents (§ 50c (2) Income Tax Act). The certificate is valid for up to 5 years. Anyone planning a fourth-quarter distribution should file in the summer.
What if tax has already been withheld?
Then the refund procedure under § 50c (3) of the Income Tax Act remains. The claim has to be filed within 4 years of the end of the calendar year in which the income was received. The money comes back, but until then it sits with the tax office.
Does a small subsidiary need transfer pricing documentation?
Yes, as soon as there are cross-border dealings with related parties. § 90 (3) of the Fiscal Code requires the transaction matrix, the factual record and the arm's-length analysis regardless of size. Only the master file covering the worldwide group falls away below €100,000,000 of turnover in the previous year.
When does the interest barrier bite on a shareholder loan?
Only once net interest expense reaches €3,000,000; below that there is an exemption threshold. Above it, interest is deductible only up to 30% of tax EBITDA. Independently of that the rate has to be at arm's length — otherwise the difference is a hidden profit distribution.
Can a foreign parent form a tax group with its German subsidiary?
As a rule not directly. § 14 of the Corporation Tax Act requires a profit and loss transfer agreement for at least 5 years and a majority of the voting rights from the beginning of the financial year — and the shareholding must be attributable to a domestic business. Without a German permanent establishment or intermediate holding company, tax grouping is therefore not available.
Is a distribution coming up?
Tell us where the parent is resident and when you intend to distribute. We will check the relief and file the application in time for it to be in place.