Double Taxation of International Shareholdings: Tax Treaties, Section 8b KStG and Tax Credits

Published on 05.10.2026

Double Taxation of Shareholdings

Anyone who holds an interest in a foreign company as an entrepreneur, shareholder or corporation (or, conversely, holds shares in a German corporation as a foreign company) faces the same question with every dividend distribution and every sale of shares: are two taxing jurisdictions reaching for the same income at the same time? Double taxation of international shareholdings is therefore not a one-off issue. Unlike exit taxation, which concerns a single event at a specific point in time, this risk recurs with every distribution and every transaction. German law and the double taxation treaties provide several instruments to avoid or reduce this double burden: the participation exemption under Section 8b of the German Corporate Income Tax Act (Körperschaftsteuergesetz, KStG), the trade tax deductions, the credit for foreign taxes and, as a counterweight, CFC taxation (Hinzurechnungsbesteuerung) under the German Foreign Tax Act (Außensteuergesetz, AStG).

Why Does Double Taxation Arise with International Shareholdings?

Double taxation arises as soon as two states tax the same transaction. Under the worldwide income principle, the state of residence of the shareholder generally taxes all income from shareholdings earned anywhere in the world. In Germany, unlimited tax liability is linked to the place of management or registered office of a corporation in Germany (Section 1 (1) KStG) or to the residence or habitual abode of an individual (Section 1 of the German Income Tax Act, EStG). The state in which the distributing or sold company is resident, by contrast, often levies its own withholding tax on dividends and sometimes also on capital gains. Without a corrective mechanism, the same income would thus be taxed twice, once at source and once in the hands of the recipient.

In addition to this juridical double taxation (two states tax the same person on the same income), shareholdings regularly involve a second level: economic double taxation. The same profit is first subject to corporate income tax at the level of the distributing company and is then taxed again in the hands of the dividend recipient, that is, at two different taxpayers. The corporate participation exemption (Section 8b KStG) is aimed at this prior burden.

The Methods Articles in Tax Treaties: Exemption and Credit for Income from Shareholdings

Within a double taxation treaty, it is not the distributive rule alone that determines the actual burden, but the so-called methods article, typically Article 23A (exemption method) or Article 23B (credit method) of the OECD Model Tax Convention. Structure, methods and the tie-breaker rule are explained in our article on the basics of double taxation agreements. For income from shareholdings, one special feature is important: for dividends, Germany as a rule agrees on the credit method in its treaties, with an exemption only for substantial holdings above a minimum percentage specified in the treaty; the credit method applies even where the treaty in question provides for exemption for other types of income, such as profits of a permanent establishment.

Numerous German double taxation treaties contain this treaty-based participation exemption: if a corporation holds a minimum shareholding specified in the treaty (often 10 % or 25 %), Germany exempts the dividend. For individuals as recipients, this exemption does not generally apply. For corporations, it has an effect alongside Section 8b KStG above all for trade tax (Section 9 no. 8 of the German Trade Tax Act, GewStG). The 5 % flat-rate add-back under Section 8b (5) KStG and the correspondence principle under Section 8b (1) sentences 2 and 3 KStG also apply to a treaty exemption: if the distribution reduced the income of the paying company, the exemption does not apply. Whether and to what extent such a clause applies in the individual case must be examined on the basis of the specific treaty. Anti-abuse provisions such as Section 50d (3) EStG, which under certain conditions denies foreign companies relief from German withholding tax on investment income, are not covered in this article; they must be examined separately in the individual case.

Dividends from International Shareholdings: Article 10 of the OECD Model and Withholding Tax

For ongoing distributions, Article 10 of the OECD Model is the relevant distributive rule. It generally allocates the taxing right to the state of residence of the dividend recipient, but grants the source state (that is, the state in which the distributing company is resident) a limited right to withhold tax. Under the Model Convention, withholding tax on a substantial holding, defined as a direct holding of at least 25 % of the capital of the distributing company, may not exceed 5 %; for portfolio dividends below this threshold, the cap is 15 %. Some German treaties deviate from this and grant the reduced rate in some cases from as little as 10 %. The specific treaty text is always decisive.

If the source state initially withholds its full domestic tax rate even though the treaty only permits a lower rate, the difference must be reclaimed through a refund or exemption procedure with the competent foreign authority, usually by submitting a certificate of tax residence issued by the German tax office. Procedures and deadlines are governed by the law of the source state and should be coordinated with an adviser there. Important for the German side: withholding tax retained in excess of the treaty rate cannot be credited in Germany; it can only be recovered through the foreign refund procedure. For the reverse case, German withholding tax on dividends paid to recipients resident abroad, our article on German withholding tax after emigration provides an overview.

The Corporate Participation Exemption under Section 8b KStG

If a German corporation holds shares in another German or foreign corporation, the national participation exemption of Section 8b KStG applies in addition to the treaty. It is the central mechanism against economic double taxation in group and holding structures.

Ongoing Dividends and the Portfolio Holding Rule (Section 8b (4) KStG)

Under Section 8b (1) KStG, receipts within the meaning of Section 20 (1) no. 1 EStG, in particular dividends, are generally disregarded when determining the income of the receiving corporation. Under Section 8b (5) KStG, a flat 5 % of the receipts is treated as non-deductible business expenses, so that in effect 95 % of the dividend remains exempt from corporate income tax.

Section 8b (4) KStG, the so-called portfolio holding rule (Streubesitzklausel), contains a restriction of considerable practical importance: the exemption for ongoing profit distributions does not apply if the direct shareholding of the receiving corporation at the beginning of the calendar year amounts to less than 10 % of the share capital. The dividend is then fully subject to corporate income tax; the exemption is lost entirely, not just proportionately.

If a shareholding of at least 10 % is acquired in a single acquisition during the year, this acquisition is deemed to have taken place at the beginning of the calendar year under Section 8b (4) sentence 6 KStG. Buying smaller blocks of shares, with which an existing portfolio holding only exceeds the 10 % threshold in total, is not sufficient for this. The Federal Fiscal Court (Bundesfinanzhof, BFH) does, however, accept an economically uniform acquisition of a block of at least 10 %, even from several sellers (judgment of 6 September 2023, I R 16/21).

Capital Gains from International Shareholdings (Section 8b (2) KStG)

A separate rule, independent of the portfolio holding rule, applies to gains from the sale of shares in another corporation. Under Section 8b (2) KStG, capital gains are disregarded regardless of the size of the shareholding. Even a shareholding well below 10 % therefore benefits from the exemption, provided that no statutory exception applies, for example for shares on which a tax-effective write-down to going-concern value was made in the past (Section 8b (2) sentence 4 KStG). Under Section 8b (3) sentence 1 KStG, 5 % of the gain is also treated as non-deductible business expenses here, so that the exemption is in effect 95 %.

The distinction between full taxation of portfolio dividends and the 95 % exemption for capital gains is of practical importance for planning: a sale of shares can be more favourable for tax purposes than years of distributions from the same portfolio holding.

Trade Tax: Deductions under Section 9 no. 2a, no. 7 and no. 8 GewStG

The corporate income tax exemption says nothing yet about trade tax on dividends. For dividends from a German corporation, the deduction under Section 9 no. 2a GewStG is also required; for dividends from a foreign corporation, the deduction under Section 9 no. 7 GewStG. Both require a shareholding of at least 15 % at the beginning of the assessment period. If the shareholding is lower, the dividend exempted under Section 8b KStG is added back via Section 8 no. 5 GewStG and is fully subject to trade tax. Activity requirements that previously applied to companies outside the EU are no longer contained in the current wording of Section 9 no. 7 GewStG. For dividends exempt under a treaty participation exemption, Section 9 no. 8 GewStG provides for a separate deduction (minimum shareholding of 15 % or a lower threshold under the treaty).

For capital gains, by contrast, the 15 % threshold does not apply: the exemption under Section 8b (2) KStG also carries through to trade tax via the determination of profit (Section 7 GewStG), so that capital gains remain 95 % tax-exempt for trade tax purposes as well, regardless of the size of the shareholding.

Shareholdings of Individuals as Private or Business Assets

If an individual holds the international shareholding directly, Section 8b KStG does not apply. For shares held as private assets, dividends are generally subject to the flat-rate withholding tax (Abgeltungsteuer) of 25 % plus solidarity surcharge (Section 32d (1) EStG). The same applies to capital gains, unless the shareholder held at least 1 % within the last five years: in that case, Section 17 EStG applies with the partial income method (Teileinkünfteverfahren).

Under the partial income method, only 60 % of the income is taxable under Section 3 no. 40 EStG, and 60 % of the related expenses remain deductible under Section 3c (2) EStG. It applies if the shareholding is held as business assets, to sales within the scope of Section 17 EStG, or on application under Section 32d (2) no. 3 EStG. This application can be made by anyone who holds at least 25 %, or who holds at least 1 % and at the same time works professionally for the company with significant entrepreneurial influence. The application must be made no later than with the income tax return and applies for five assessment periods. It can be revoked, but after revocation a new application for this shareholding is excluded.

The question of double taxation also arises for individuals. Foreign withholding tax is credited under Section 32d (5) EStG for investment income subject to the flat-rate tax (up to a maximum of 25 %), and under Section 34c EStG for income taxed at the progressive rates (partial income method, business assets), in treaty cases in conjunction with Section 34c (6) EStG. In each case, only the tax that could be levied under the treaty is credited.

Credit for Foreign Tax: Section 34c EStG and Section 26 KStG

If the relevant treaty provides for the credit method for dividends, or if there is no treaty with the state of the distributing company, Section 34c EStG applies to income of individuals taxed at the progressive rates; for corporations, Section 26 KStG refers to this rule. The foreign tax assessed and paid, reduced by any refund claim under the treaty, is credited against the German tax attributable to precisely this foreign income, limited by the so-called maximum creditable amount.

Under Section 34c (1) EStG in conjunction with Section 68a of the German Income Tax Implementing Ordinance (EStDV), this maximum amount is determined separately for each foreign state (per-country limitation). Unused credit capacity in one state can therefore generally not be offset against excessive tax from another state. If the foreign tax exceeds the proportionate German tax amount, the difference remains as a double burden. Alternatively, on application under Section 34c (2) EStG, the foreign tax can be deducted when determining income, which may be more favourable, for example, in the case of losses.

Distinction from CFC Taxation under the AStG

The relief described so far presupposes that profits are actually distributed or shares sold. A different problem arises if profits are retained in a low-taxed foreign company, for example a foreign holding company, so that no distribution and thus no German taxation takes place. For this case, the German Foreign Tax Act provides, with CFC taxation under Sections 7 et seq. AStG, its own right of access that is independent of treaty protection. An overview of the tax consequences of cross-border structures is also contained in our article on moving a company’s registered office abroad.

If a person subject to unlimited tax liability, alone or together with related persons, controls a foreign company (more than 50 % of the voting rights, the nominal capital or the entitlement to profits or liquidation proceeds, Section 7 (2) AStG), and that company earns income that does not fall under the catalogue of active income in Section 8 (1) AStG (for example from capital investments, intra-group financing or certain licences) and is subject to an income tax burden of less than 15 % (Section 8 (5) AStG), this income is attributed proportionately to the taxpayer and taxed in Germany, irrespective of any distribution. Minor cases are excluded by the exemption limit in Section 9 AStG. The attribution is not linked to a dividend but to the ongoing income of the intermediate company. It also applies if the treaty provides for the exemption of dividends (Section 20 (1) AStG), and Section 8b (1) KStG does not apply to the attributed amount (Section 10 (2) sentence 4 AStG).

Double Inclusion within CFC Taxation: Sections 11 and 12 AStG

CFC taxation contains two corrective mechanisms against the same income being taxed twice. Under Section 12 AStG, the taxes levied on the intermediate company in respect of the attributed income are credited against the German tax attributable to the attributed amount. Section 11 AStG prevents an amount that has already been attributed from being taxed again when the intermediate company later distributes the profit or the shareholding is sold: a deduction equal to the attributed amounts already taxed is taken into account. Amounts already attributed should therefore be documented from the outset so that the later deduction can be claimed.

Unclear legal position: obtain a binding ruling. Where the tax assessment in Germany is not certain or is foreseeably subject to change, an application to the tax office for a binding ruling (verbindliche Auskunft, Section 89 (2) of the German Fiscal Code, AO) belongs before implementation. It binds the tax office to the assessment given for a precisely defined set of facts that has not yet been realised, and it is subject to a fee. In our view, a tax adviser who does not recommend this in such a situation is acting irresponsibly: the client risks having to litigate over the outcome years later, and that costs time and money.

If Double Taxation Remains Nevertheless: Mutual Agreement Procedure and EU Dispute Resolution

In individual cases, the mechanisms described do not fully take effect, for example where the two tax administrations apply the treaty inconsistently. The mutual agreement procedure under Article 25 of the OECD Model is then available: a procedure between the competent authorities that is initiated on application, is free of charge for the taxpayer and must be applied for in Germany at the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt). Within the EU, there is also the German EU Double Taxation Dispute Resolution Act (EU-Doppelbesteuerungsabkommen-Streitbeilegungsgesetz, EU-DBA-SBG, implementing Directive (EU) 2017/1852) and, for transfer pricing cases, the EU Arbitration Convention. Like some treaties, both provide for binding arbitration if no agreement is reached after certain deadlines have expired. The parties to the procedure are the states; a solution reached generally requires the taxpayer’s consent.

Overview: Which Instrument Applies in Which Scenario?

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Checklist: Avoiding Ongoing Double Taxation of International Shareholdings

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Example

Example: Alpha GmbH, whose managing director Julia manages the shareholdings, holds 8 % of the shares in a foreign corporation. There is a treaty with the state where that company is based, with a withholding tax rate of 15 % for portfolio dividends. Julia initially assumes that, as with a group shareholding, 95 % of the annual distribution will remain exempt from corporate income tax. In fact, because the shareholding is below 10 %, the portfolio holding rule of Section 8b (4) KStG applies, so that the dividend is fully subject to corporate income tax; in addition, because the 15 % threshold is not reached, there is no trade tax deduction under Section 9 no. 7 GewStG. A forward-looking review, for example acquiring further shares with effect before the beginning of the year in order to reach the 10 % and 15 % thresholds, or weighing up a sale of shares instead of ongoing distributions, could have reduced the tax burden. Such arrangements must always also be measured against the general anti-abuse rule in Section 42 AO.

Conclusion

Double taxation of international shareholdings is a recurring risk that arises anew with every dividend and every transaction. What matters is the interplay between the treaty methods article, Section 8b KStG with its portfolio holding rule, the trade tax deductions, the credit under Section 32d (5) and Section 34c EStG and Section 26 KStG, and CFC taxation. Anyone who knows these thresholds and requirements can reduce the ongoing burden and, in many cases, avoid double taxation. The review should take place before the next distribution or transaction, not only after the tax assessment has been received.

Frequently Asked Questions

Are dividends from a foreign subsidiary tax-exempt for a German GmbH?

Largely, yes: under Section 8b (1) and (5) KStG, in effect 95 % of the dividend remains exempt from corporate income tax if the direct shareholding at the beginning of the calendar year amounts to at least 10 %. This does not apply to the extent that the distribution reduced the income of the foreign company. For trade tax, a shareholding of at least 15 % is also required.

What applies to a shareholding of less than 10 per cent?

Ongoing dividends are then fully subject to corporate income tax under Section 8b (4) KStG and, in the absence of a deduction, also fully subject to trade tax. Gains from the sale of the shares, by contrast, remain 95 % tax-exempt under Section 8b (2) KStG regardless of the size of the shareholding, including for trade tax.

How high may foreign withholding tax on dividends be?

The OECD Model Convention provides for a maximum of 5 % for a direct holding of at least 25 % and otherwise a maximum of 15 %; some treaties deviate from this. Anything the source state withholds beyond that is not credited in Germany but must be reclaimed in the source state, usually with a certificate of tax residence.

Why is trade tax payable despite Section 8b KStG?

Trade tax follows its own rules. Dividends are only deducted if the shareholding amounts to at least 15 % at the beginning of the assessment period (Section 9 no. 2a, 7 GewStG) or the requirements of Section 9 no. 8 GewStG for treaty participation dividends are met. Otherwise, the exempt dividend is added back under Section 8 no. 5 GewStG.

What can I do if I am taxed twice despite a treaty?

You can apply to the Federal Central Tax Office for a mutual agreement procedure under the relevant treaty. Within the EU, the dispute resolution procedure under the EU-DBA-SBG is also available, which can lead to binding arbitration if no agreement is reached after the deadline has expired. Deadlines and responsibilities should be examined at an early stage.

Attorney Dr. Johannes Fiala and the firm have published extensively on international tax and corporate law and advise entrepreneurs, shareholders and corporations on the tax structuring of international shareholdings, from reviewing the shareholding thresholds to coordination with foreign tax advisers. Please get in touch with the firm without obligation to discuss your international shareholding structure in an initial consultation.