In a decision published by the end of 2018, the German Federal Tax Court had a chance to rule on the proof of economic substance requirements according to the ECJ decision Cadbury Schweppes. The interpretation of the principles set by the ECJ has been subject to debate in Germany since the decision was handed down in 2006. Now, the Federal Tax Court had a chance to rule on the issue but failed to clarify the requirements for cross-border investments through a German holding company (as of 13.6.2018 – I R 94/15).

The German parent company had a 100% stake in a Dutch BV, which in turn had a 100% stake in a Cypriot C-Ltd. C-Ltd. acquired copyright licenses and granted sublicenses to group distribution companies in Europe. The license income was qualified as passive income pursuant to the German CFC rules, which was taxed at a low tax rate (below 25%). The plaintiff objected to adding passive income to its German tax base on the grounds that C-Ltd. had sufficient economic substance in Cyprus allowing for an escape from German CFC rules.