Circular By The German Federal Ministry Of Finance Regarding Return Of Capital By Non-European Corporations – Tax-neutral Return Of Capital Is Possible – Financial Services

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On 21 April 2022, the German Federal Ministry of Finance (BMF) published its long-awaited circular regarding the return of capital by non-European corporations. In response to the standing case law of the German Federal Fiscal Court, the BMF addresses the tax treatment of share capital repayments and returns of contributed equity not made to the share capital (eg share premium) by non-European corporations and clarifies that such payments can be made tax-neutral.

The circular affects all German taxpayers who hold an interest in a non-European corporation receiving returns of share capital or other distributions from it. We have therefore summarised selected aspects below.


  • A neutral return of share capital is possible. The requirements of Sec. 7 para. 2 KapErhStG must be considered.
  • A tax-neutral return of contributed equity other than share capital is possible provided that the so-called order of use is considered. The basis for the calculation of the return on capital is the foreign profit and loss statement.
  • Due to the high evidence requirements, it remains to be seen whether the circular will provide the hoped-for ease.

The German Federal Fiscal Court (BFH) has already confirmed in numerous decisions that corporations domiciled in non-European countries are also able to return share capital and other contributed equity to their shareholders in a tax-neutral manner. Until now, the tax authorities have not applied these decisions and therefore also qualified a return of capital by non-European corporations as taxable dividend.

With the circular dated 21 April 2022, the tax authorities accept the established case law of the German Federal Fiscal Court for all cases that are still open and clarify how and under what circumstances a return of capital is tax-neutral and which documents and evidence are required.

The Federal Ministry of Finance defines non-European corporations as entities that are not subject to unlimited tax liability in Germany, an EU member state or an EEA state but in another state at the time of the return of capital. This includes, in particular, corporations that are subject to unlimited tax liability in the USA, the United Kingdom or the Channel Islands. Provided that EEA companies have not filed a return of capital application pursuant to Sec. 27 para. 8 KStG, the principles of the circular are also applicable to EEA companies. Therefore, despite the circular, a return of capital application in accordance with Sec. 27 para. 8 KStG must still be filed for EU companies.

In the case of repayment of share capital, Sec. 7 para. 2 KapErhStG must be considered. This applies to cases in which share capital has been created through the conversion of company funds. As proof, the BMF requires in particular the resolution on the share capital reduction and repayment. In practice, it is also advisable to keep on file the resolutions on the share capital increase as well as the corresponding bank account statements for the payment and repayment.

The return of other contributed equity can also be tax-neutral. However, the so-called order of use must be considered. Consequently, profits of non-European corporations are considered distributed first and hence, lead to taxable dividend income at the level of the shareholders. Only to the extent that the distributions exceed a distributable profit the distribution is to be recognized as tax-neutral return of capital. The basis for calculating the return of capital amount is the foreign profit and loss statement preceding the year of the payment. A reconciliation of the foreign profit and loss statement into German tax law is not required. As documents and evidence, the BMF requires, in particular, evidence of the unlimited tax liability of the paying corporation as well as its foreign balance sheet and profit and loss statement, the holding percentage of the German shareholders and resolutions and evidence (bank account statements ) of the distribution made. In addition, resolutions and evidence of capital contributions not made to the share capital should also be kept on file.

Payments already made by non-European corporations should be examined on the basis of the principles of the published circular. Future distributions should be planned based on the order of use and the required documentation should be carefully kept on file in order to ensure the tax neutrality of the distribution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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