The Berlin-Brandenburg Tax Court has held that the Germany-US tax treaty requires US withholding tax on dividends to be credited against German trade tax even though the German Trade Tax Act does not contain provisions comparable to the income/corporation tax credit rules.
Double taxation frequently arises in cross-border situations due to the broad application of the worldwide income principle. Tax treaties are designed to mitigate or eliminate such double taxation. In the context of Germany, where a treaty does not provide for the exemption method to eliminate double taxation, foreign taxes are typically credited against German income or corporation tax; alternatively, they may be deducted from the German tax base. Germany’s Income Tax Act and Corporation Tax Act both contain relevant credit and deduction mechanisms.
In its 14 January 2026 decision, the Fiscal Court of Berlin-Brandenburg considered whether US withholding tax on dividend income could be credited against German trade tax. The case involved a German limited liability company (GmbH) that acquired approximately 26% of the shares in a US stock corporation in November 2020. The GmbH received a dividend the following month on which a 5% withholding tax was levied in accordance with the Germany-US tax treaty. The dividend was not considered for corporate income tax purposes pursuant to section 8b of the German Corporate Income Tax Act (participation exemption) because the acquisition of a minimum 10% stake in a company during the year is deemed to have taken place at the beginning of the calendar year, meaning that the conditions for application of the participation exemption were met.
Since there is no corresponding fiction in the trade tax law and the German company did not yet own the shares at the beginning of the assessment period, the dividend was subject to trade tax. The GmbH sought to credit the US withholding tax against its trade tax liability, arguing that the dividend was subject to double taxation and that the treaty, which specifically lists the German trade tax as an in-scope tax on income, overrides domestic law. The issue arose only because of the specific situation: namely, that the dividend was exempt from corporation tax but remained taxable for trade tax purposes.
The fiscal court found that double taxation existed because both Germany and the US imposed a comparable tax on the same taxpayer for the same taxable item and for the same period. The treaty relief from double taxation article refers broadly to “income tax,” without distinguishing between income tax, corporation tax or trade tax. In the court’s view, neither the characterisation of trade tax as an “object tax” tied to the existence and operation of a business nor the strictly domestic focus of trade tax law prevents its inclusion for credit purposes. The treaty’s purpose of preventing double taxation requires that foreign withholding tax be creditable against trade tax when trade tax also is a relevant German tax on the income.
At first glance, crediting foreign withholding tax against German trade tax may seem unexpected, given the absence of an explicit crediting provision in the trade tax law. However, the outcome is consistent with the treaty’s purpose: where Germany imposes an additional tax on income—such as trade tax—double taxation should be relieved through a credit. This conclusion is bolstered by a similar 2021 decision of the Tax Court of Hesse.
Whether the Berlin-Brandenburg court’s reasoning will withstand an appeal to the Federal Fiscal Court (BFH), however, remains uncertain. In 2024, the BFH held that foreign withholding taxes cannot be deducted when determining trade income. Although the legal framework for deductions differs from that for credits, the BFH noted (in point 23 of its decision) that parallels may exist between the two mechanisms. This observation leaves open the possibility that the BFH may take a more restrictive view of crediting foreign taxes against trade tax.
Roland Speidel
Katrin Driesch
BDO in Germany
Double taxation frequently arises in cross-border situations due to the broad application of the worldwide income principle. Tax treaties are designed to mitigate or eliminate such double taxation. In the context of Germany, where a treaty does not provide for the exemption method to eliminate double taxation, foreign taxes are typically credited against German income or corporation tax; alternatively, they may be deducted from the German tax base. Germany’s Income Tax Act and Corporation Tax Act both contain relevant credit and deduction mechanisms.
Facts of the Case
In its 14 January 2026 decision, the Fiscal Court of Berlin-Brandenburg considered whether US withholding tax on dividend income could be credited against German trade tax. The case involved a German limited liability company (GmbH) that acquired approximately 26% of the shares in a US stock corporation in November 2020. The GmbH received a dividend the following month on which a 5% withholding tax was levied in accordance with the Germany-US tax treaty. The dividend was not considered for corporate income tax purposes pursuant to section 8b of the German Corporate Income Tax Act (participation exemption) because the acquisition of a minimum 10% stake in a company during the year is deemed to have taken place at the beginning of the calendar year, meaning that the conditions for application of the participation exemption were met.Since there is no corresponding fiction in the trade tax law and the German company did not yet own the shares at the beginning of the assessment period, the dividend was subject to trade tax. The GmbH sought to credit the US withholding tax against its trade tax liability, arguing that the dividend was subject to double taxation and that the treaty, which specifically lists the German trade tax as an in-scope tax on income, overrides domestic law. The issue arose only because of the specific situation: namely, that the dividend was exempt from corporation tax but remained taxable for trade tax purposes.
Decision of the Court
The fiscal court found that double taxation existed because both Germany and the US imposed a comparable tax on the same taxpayer for the same taxable item and for the same period. The treaty relief from double taxation article refers broadly to “income tax,” without distinguishing between income tax, corporation tax or trade tax. In the court’s view, neither the characterisation of trade tax as an “object tax” tied to the existence and operation of a business nor the strictly domestic focus of trade tax law prevents its inclusion for credit purposes. The treaty’s purpose of preventing double taxation requires that foreign withholding tax be creditable against trade tax when trade tax also is a relevant German tax on the income.
BDO Perspective
At first glance, crediting foreign withholding tax against German trade tax may seem unexpected, given the absence of an explicit crediting provision in the trade tax law. However, the outcome is consistent with the treaty’s purpose: where Germany imposes an additional tax on income—such as trade tax—double taxation should be relieved through a credit. This conclusion is bolstered by a similar 2021 decision of the Tax Court of Hesse.Whether the Berlin-Brandenburg court’s reasoning will withstand an appeal to the Federal Fiscal Court (BFH), however, remains uncertain. In 2024, the BFH held that foreign withholding taxes cannot be deducted when determining trade income. Although the legal framework for deductions differs from that for credits, the BFH noted (in point 23 of its decision) that parallels may exist between the two mechanisms. This observation leaves open the possibility that the BFH may take a more restrictive view of crediting foreign taxes against trade tax.
Roland Speidel
Katrin Driesch
BDO in Germany