On 16 July 2026, representatives of BDO Germany participated in a meeting with the German Federal Central Tax Office (FCTO) to discuss, inter alia, the treatment of US disregarded entity (DRE) structures and the implications for German dividend withholding tax relief. The FCTO indicated that it is still reviewing these matters (for prior coverage, see the article in the May 2026 issue of Corporate Tax News). Nevertheless, US investors should be prepared to document that German withholding tax relief will not result in inappropriate US foreign tax credit claims.
The discussion concerns situations in which a German distributing company is treated as a transparent entity or DRE for US federal income tax purposes following a check-the-box election. In recent months, practitioners have observed increased scrutiny of withholding tax relief applications submitted by US shareholders in cases involving DRE structures, resulting in uncertainty for affected investors.
The FCTO’s concern does not appear to be the check-the-box election itself. Rather, the authorities appear focused on preventing a mismatch in which German withholding tax on dividends is reduced, exempted or refunded in Germany while a US investor also obtains an unintended tax benefit by claiming a foreign tax credit for the same tax in the US.
This heightened review aligns with Germany’s broader effort to address potential withholding tax abuse following the “Cum-Ex scandals,” which involved complex (mainly) pre-2012 transactions that exploited dividend payment rules and enabled multiple parties to claim refunds of the same tax even though it had been paid only once.
In cases involving potential DRE structures, the FCTO is requesting additional information. Applicants may be asked to confirm whether the German distributing company is treated as a DRE for US tax purposes and to provide a self-certification regarding the US tax treatment of the relevant withholding tax.
The authorities are also evaluating feedback recently received from the US Internal Revenue Service (IRS) on whether German DRE structures could give rise to inappropriate US foreign tax credit claims. No final position has been adopted. The FCTO first contacted the IRS on this matter in 2025.
For US groups holding German subsidiaries treated as DREs, current developments do not necessarily call existing structures into question. Based on information available to date, the focus appears to be on demonstrating that no inappropriate foreign tax credit is claimed in the US. Where taxpayers can provide the required self-certification, treaty relief should generally remain available, assuming all other requirements are met.
Although the current discussion primarily relates to German dividend withholding tax, similar questions may arise in the future with respect to cross-border royalty payments.
The German tax authorities have not adopted a final position on DRE structures. The current emphasis is on preventing potential foreign tax credit mismatches rather than challenging check-the-box structures themselves. The authorities appear to be working toward a practical approach for non-abusive arrangements.
US investors with German DRE structures should anticipate additional documentation requirements but should not assume that treaty relief will be automatically denied.
Affected US investors should be aware of these developments and consider reviewing German DRE structures and related withholding tax relief claims, so they are prepared to meet any revised requirements, if necessary. Once the FCTO has reviewed the IRS feedback and finalised its position, two potential paths may emerge:
Claudia Kachur
Mechthild Pietrek
BDO in Germany
Background
The discussion concerns situations in which a German distributing company is treated as a transparent entity or DRE for US federal income tax purposes following a check-the-box election. In recent months, practitioners have observed increased scrutiny of withholding tax relief applications submitted by US shareholders in cases involving DRE structures, resulting in uncertainty for affected investors.
Focus of the FCTO Review
The FCTO’s concern does not appear to be the check-the-box election itself. Rather, the authorities appear focused on preventing a mismatch in which German withholding tax on dividends is reduced, exempted or refunded in Germany while a US investor also obtains an unintended tax benefit by claiming a foreign tax credit for the same tax in the US.This heightened review aligns with Germany’s broader effort to address potential withholding tax abuse following the “Cum-Ex scandals,” which involved complex (mainly) pre-2012 transactions that exploited dividend payment rules and enabled multiple parties to claim refunds of the same tax even though it had been paid only once.
Current Status
In cases involving potential DRE structures, the FCTO is requesting additional information. Applicants may be asked to confirm whether the German distributing company is treated as a DRE for US tax purposes and to provide a self-certification regarding the US tax treatment of the relevant withholding tax.The authorities are also evaluating feedback recently received from the US Internal Revenue Service (IRS) on whether German DRE structures could give rise to inappropriate US foreign tax credit claims. No final position has been adopted. The FCTO first contacted the IRS on this matter in 2025.
Implications for US Investors
For US groups holding German subsidiaries treated as DREs, current developments do not necessarily call existing structures into question. Based on information available to date, the focus appears to be on demonstrating that no inappropriate foreign tax credit is claimed in the US. Where taxpayers can provide the required self-certification, treaty relief should generally remain available, assuming all other requirements are met.
Potential Impact Beyond Dividends
Although the current discussion primarily relates to German dividend withholding tax, similar questions may arise in the future with respect to cross-border royalty payments.
BDO Perspective
The German tax authorities have not adopted a final position on DRE structures. The current emphasis is on preventing potential foreign tax credit mismatches rather than challenging check-the-box structures themselves. The authorities appear to be working toward a practical approach for non-abusive arrangements.US investors with German DRE structures should anticipate additional documentation requirements but should not assume that treaty relief will be automatically denied.
Affected US investors should be aware of these developments and consider reviewing German DRE structures and related withholding tax relief claims, so they are prepared to meet any revised requirements, if necessary. Once the FCTO has reviewed the IRS feedback and finalised its position, two potential paths may emerge:
- Potential for abuse identified: The FCTO indicated that it intends to make a form available online for affected applicants to complete.
- No potential for abuse identified: No additional documentation requirements or other adverse implications would be expected for withholding tax relief applications.
Claudia Kachur
Mechthild Pietrek
BDO in Germany