Münster Finance Court rules on dividend taxation

The Münster Finance Court has issued a ruling regarding the taxation of dividends generated by foreign permanent establishments. According to the decision (Az. 9 K 552/22 K), the so-called ‘Schachtelstrafe’ (participation penalty) under § 8b para. 5 sentence 1 of the Corporate Income Tax Act (KStG) applies even when the profits of a foreign permanent establishment are exempt from German taxation under a Double Taxation Agreement (DBA).

Under current regulations, 95% of dividends are generally tax-exempt to prevent multiple taxation within corporate groups. However, the law treats 5% of these dividends as non-deductible business expenses, effectively subjecting that portion to taxation. The court ruled that this 5% rule increases the domestic assessment base regardless of whether the foreign establishment's income is otherwise exempt due to international treaties.