The European Commission has formally requested Germany to change its anti-abuse provision on withholding tax relief. German tax authorities refuse withholding tax relief for a foreign company owned by persons who would not be entitled to the relief if they received the income directly, and if the foreign company does not pursue genuine economic activities. It should be underlined that the Commission does not criticize the aim of the anti-abuse measure but solely the disproportionate requirements imposed on foreign companies in order to prove the existence of a "genuine economic activity".
The aim of the German anti-abuse provision is to prevent taxpayers who are not entitled to a withholding tax relief (exemption or refund) from obtaining one by means of a foreign company set up for this sole purpose. With this objective, the German anti-abuse provision refuses the tax relief if any of the following conditions are met:
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there is no economic or other relevant reasons to establish the foreign company or;
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the foreign company has no adequate business premises for its activities.
The contested measure is disproportionate in particular as regards the second condition listed above, where the possibility to produce proof to the contrary does not exist. Therefore, the German measure goes beyond what is necessary to attain its objective of preventing tax evasion.