When profits are distributed to a corporation, these profits are
generally exempt from corporate taxation at the shareholder
level. However, an amount equivalent to 5% of a corporation’s
dividend income is treated as a non-deductible business
expense. Thus, only 95% of the dividend income received is
effectively tax-exempt. Costs actually incurred are deductible
without limit. This rule applies to dividends which are paid by
domestic or foreign corporations.
The above-mentioned tax exemption applies to dividends received after February 28 2013,
but not if the direct shareholding at the start of the calendar year
amounts to less than 10% of the share capital. Furthermore, the
tax exemption does not apply to credit institutions and insurance
companies if special requirements are met. As a consequence,
these dividends are completely subject to tax.
The corporation paying the dividend must deduct withholding tax
(Kapitalertragsteuer) on the dividend, generally at a rate of 25%
(plus a solidarity surcharge of 5.5% of 25%), and remit such tax
to the tax authorities. In principle the shareholder can offset the
amount so withheld against its ultimate tax liability. In general,
the withholding tax is final for non-resident corporations.