Withholding Tax Relief Modernisation Act from the perspective of banking practice

By Bernhard Uitz and Karsten Schultz

The Withholding Tax Relief Modernisation Act (Abzugsteuerentlastungsmodernisierungsgesetz) – not just a matter of words; the practical implementation of new requirements pertaining to securities settlement, which were adopted in 2021, is also proving to be quite a challenge. The aim of this article is to provide a brief overview of the Act’s implementation status from the perspective of banking practice.

The Withholding Tax Relief Modernisation Act (AbzStEntModG) is set to bring about significant changes for banks, and must be implemented by the end of this year. The new reporting obligations for capital gains tax on dividends from German shares and the depositary receipts of domestic issuers (known as “MiKaDiv”) are particularly relevant in this regard. These changes will have a significant impact on the affected applications of banks. Extensive adjustments are required, in order to fulfil the new legal requirements.

The provisions of the Withholding Tax Relief Modernisation Act (AbzStEntModG) must be implemented by all financial institutions that settle domestic securities for private and institutional clients. A clear time frame has been established: The collection of relevant data must begin in 2024, in order that it is available for dividend distributions from the beginning of 2025, which is why any necessary work on the banks’ IT systems must be completed by the end of 2024. The first notification to the Federal Central Tax Office (BZSt) shall then be submitted on 31 July 2026.

Subsequently, the banks concerned shall be obligated to make corrections for an unlimited period of time if there have been errors in tax deductions or tax information.

Effects of the Withholding Tax Relief Modernisation Act (AbzStEntModG) are being underestimated

According to our observations, there are clear differences in the implementation status with regard to Germany’s financial institutions. Some banks have already successfully completed the technical design phase, and are working on the practical implementation in their IT systems. Other market players – especially smaller financial institutions – are stuck in the conceptualisation process, as the law’s far-reaching impact on their own various systems has been underestimated. There are also issues to be clarified by the legislator and between the market players.

Added value through a new data budget?

Here is a question that our clients ask us in the context of the Withholding Tax Relief Modernisation Act (AbzStEntModG): Can added value be realised for the bank and the customer on the basis of the new data budget? This brings us to a sober assessment: This is a classic regulatory issue that is unlikely to generate any added value for the banks concerned. Data already known to the bank – such as closing date, value date and time of settlement – is collected and reported retrospectively to the Federal Central Tax Office (BZSt).

We have been advising our clients from the financial sector on all aspects of flat-rate withholding tax since its fundamental implementation in 2008. Legal requirements, bank-specific necessities in securities processing and IT expertise are considered holistically by our team. We can, therefore, also provide advice and support for any ongoing projects. Please feel free to reach out.

Parallels between the Withholding Tax Relief Modernisation Act (AbzStEntModG) and CESOP

Oh, and by the way: With the implementation of the Withholding Tax Relief Modernisation Act (AbzStEntModG) and the new EU directive against VAT fraud (keyword: CESOP), we are currently working in tandem with our clients on two very similar compliance projects affecting the banking sector. For securities settlement (Withholding Tax Relief Modernisation Act [AbzStEntModG]) and payment transactions (CESOP), data must be reported to the Federal Central Tax Office (BZSt) via newly created interfaces. With the CESOP Compliance Service, DPS has developed a customised reporting solution for banks, online marketplaces and other payment service providers (PSPs) to meet the requirements of CESOP.

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