With regard to foreign investors holding (fund) investments in the US, the One Big Beautiful Bill Act could lead to an increase in US withholding tax and thus to a reduction in the effective return on US investments.
Legislative proposals
US President Trump’s ‘One Big Beautiful Bill Act’, running to 900 pages, could bring about comprehensive and lasting changes to the US economy. The US Senate has already given its approval; all that remains is for the House of Representatives to do the same. The US Congressional Budget Office estimates that this could cause the national debt to rise by more than 3 trillion USD over the next 10 years. This currently stands at approximately 37 trillion USD. ‘Section 899’ contained within the bill is intended to lead to an increase in US withholding tax in the form of a special levy on dividends, interest and royalty payments to foreign creditors. This special levy could start at 5 per cent and rise by a further 5 percentage points each year, up to a maximum of 20 percentage points.
This additional taxation, or ‘penalty tax’, could be seen as a countermeasure to global minimum taxation and country-specific digital taxes on US tech conglomerates.
Current tax treatment of German investors with US investments
In the case of US shares and funds, a so-called withholding tax is levied on dividends paid out; this is a tax that is deducted directly in the US. Thanks to the double taxation agreement (DTA) between Germany and the US, this withholding tax has so far been capped at 15 per cent (Section 43b of the German Income Tax Act (EStG) in conjunction with Article 10(2) of the DTA with the USA).
Without this agreement, the general US tax rate on dividends of 30 per cent would apply. Investors in Germany therefore benefit twice: firstly, through the treaty-based cap of 15 per cent; and secondly, through the crediting of this tax against their German income tax (Section 34c of the German Income Tax Act (EStG)). This is subject to the condition that the recipient of the dividend is the beneficial owner and meets the requirements for claiming the tax treaty relief (e.g. by submitting Form W-8BEN to the US paying agent).
Tax implications in Germany of the unilateral increase in withholding tax in the USA
Should the “Big Beautiful Bill” actually result in a unilateral increase in the US withholding tax rate on dividends to 20 per cent, the question of tax credit eligibility in Germany will arise anew.
- As long as the DTA remains in force in its current form, Article 10(2)(b) of the DTA with the USA remains binding under international law: only a 15 % withholding tax is permitted. The USA could not unilaterally amend the treaty, but would have to terminate it (Article 29 of the US DTA), renegotiate it, or assume that Germany would accept this so-called ‘treaty override’ at the expense of German investors.
- If the USA nevertheless levies 20 % withholding tax contrary to the DTA, this constitutes a breach of treaty under international law. Germany, however, remains bound by its own laws: under Section 34c(1), second sentence, of the Income Tax Act (EStG), foreign tax is creditable only to the extent that it is lawfully levied under a DTA. This means that only 15 percentage points of the US withholding tax may be credited against the German tax liability. From a German perspective, the additional 5 percentage points would not be creditable, but would instead constitute an economically irrecoverable additional tax burden.
For German investors, this would mean in practical terms that the overall tax burden on income from US investments in the form of dividends would effectively increase. For a US dividend of, say, EUR 1,000, EUR 200 in US withholding tax would be deducted upon payment in future. Of this amount, only EUR 150 could be credited against German income tax in Germany. The remaining €50 would be regarded as a ‘lost’ tax burden that could not be credited or offset under Section 34c of the German Income Tax Act (EStG). Credit beyond this maximum rate is currently not permitted by law in Germany, even if the actual withholding tax abroad is higher.
Conclusion
Even though an increase in US withholding tax is currently merely speculative, if implemented it would only be partially creditable – with real financial disadvantages for German investors. The legal basis for this lies in the US–Germany Double Taxation Agreement and the German Income Tax Act itself. The 15 % remains the legal upper limit for credit – even if the US withholds more. Should licences also be covered by Section 899 in future and be subject to an additional withholding tax, corporate groups should also keep a close eye on future developments.
