Cologne Fiscal Court: Return of Capital from EU Corporations Only Permitted with a Reconciliation Statement

Payments from a return of capital are not taxable as income from capital assets for the shareholder pursuant to Section 20(1)(1), third sentence, of the Income Tax Act (EStG). They reduce the acquisition cost of the equity interest. However, if the payment exceeds the acquisition cost or if there is no acquisition cost, a taxable capital gain may arise. For corporations from another EU member state, this requires that the return of capital be separately determined pursuant to § 27(8) of the Corporate Income Tax Act (KStG) at the company’s request. In the absence of such a determination, the payment is deemed, under the statutory presumption of § 27(8) KStG, to be a distribution of profits.

Facts of the Case

The plaintiff held shares in the British Vodafone Group Plc. As part of a so-called “Return of Value,” shareholders received Verizon shares as well as a special cash dividend in 2014. The custodian bank withheld capital gains tax on these amounts, which the tax office took into account when assessing the plaintiff’s tax liability. The plaintiff argued that this constituted a non-taxable return of capital rather than a distribution of profits. To substantiate this, they calculated a fictitious tax capital account for Vodafone dating back to 1997—based exclusively on the foreign financial statements.

In the first instance, the Fiscal Court had granted the claim. The Federal Fiscal Court (BFH) overturned the judgment in appeal proceedings and remanded the case to the Fiscal Court (judgment of May 4, 2021 – VIII R 14/20).

Court’s Decision

In the second instance, the Cologne Fiscal Court dismissed the claim. The payments constitute taxable capital gains.

In the court’s view, while the foreign commercial balance sheet is initially decisive for proving the repayment of contributions, it does not meet the requirements to correctly reconstruct the tax contribution account as the sole basis. An additional reconciliation statement under German tax law is required in accordance with § 60(2) of the Income Tax Implementation Regulation (EStDV).

Thus, the court does not follow the BMF letter dated April 21, 2022 (BStBl I 2022, 647), according to which, for individual proof in the case of third-country corporations, neither a commercial balance sheet prepared under German law nor a reconciliation statement in accordance with § 60(2) EStDV is required.

In its reasoning, the court states that shareholders of foreign corporations must not be placed in a more favorable position than in domestic cases. Furthermore, the assessment procedure under § 27(8) of the Corporate Income Tax Act (KStG) would otherwise lose its purpose. The court acknowledges the practical difficulties for minority shareholders but, in its view, these do not justify any substantive preferential treatment.

Since the plaintiffs had not submitted a reconciliation statement, their calculation was not verifiable. In the opinion of the Fiscal Court, they had not provided sufficient evidence. The doubts regarding EU law were therefore irrelevant. The case was not referred to the European Court of Justice.

Key Points

1. Without a determination of the tax contribution account pursuant to § 27(8) KStG, payments made by an EU corporation are considered taxable profit distributions. The admissibility of this legal consequence under EU law in the absence of the possibility of individual proof remains open in the appeal proceedings.
   
   
2. In the opinion of the Finance Court, individual proof of the return of contributions requires a reconciliation statement under German tax law. The foreign commercial balance sheet alone is not sufficient.
   
   
3. The Cologne Finance Court thus imposes stricter requirements than the standard of proof set forth in the Federal Ministry of Finance (BMF) letter dated April 21, 2022, for third-country corporations.
   
   

Conclusion

For private investors with holdings in publicly traded EU companies, preparing a reconciliation statement without the company’s cooperation is likely to be virtually impossible. Shareholders should therefore clarify at an early stage whether the distributing company has filed an application for a separate assessment.

The ruling of the Cologne Fiscal Court is not final. An appeal is pending before the Federal Fiscal Court (BFH) under case number VIII R 13/26. It remains to be seen whether the BFH will follow the stricter interpretation of the Cologne Fiscal Court.