International Tax Law

Question 1

What role has the DTT in German legal system?

Accepted Answer

Double Tax Treaties (DTTs) are international agreements between exactly two states (bilateral treaties) DTTs form part of the national tax law, i.e. the DTT is also a national tax law and undergoes the usual approval process for new laws:-requires the approval of Bundestag & Bundesrat (chambers of the German legislative body)-need to be ratified by Bundespräsident-comparable role to other German tax laws (ITA, General fiscal Code, VAT act etc.) DTT has rank of federal law (Art. 59 (2) GG) = same rank as national tax laws

Question 2

What legal character has the DTT?

Accepted Answer

· Regulates the scope of the right of taxation between two contracting states · Restriction (limitation) of national taxation law · DTT do not constitute taxation rights · No extension of taxation rights

Question 3

What do you need to know about partnerships? Are they a covered person regarding to the OECD Model tax convention?

Accepted Answer

OECD Model Tax Convention A partnership is a “Person” under the OECD MTC. However, it is not tax subject in Germany (only the partners are). Therefore, it is not a “Resident Person” under the OECD MTC. Partnerships are therefore not covered by the OECD MTC in case partnership is considered transparent for tax purposes (no “Covered Person”). (German) National tax law Partnerships are transparent for tax purposes, i.e. the partners and not the partnership are covered persons under the DTT (see Federal Ministry of Finance (BMF) letter ruling dated 26 September 2014) In case of non-German partnerships: type comparison according to BMF letter ruling 24 December 1999 in order to determine tax status Partnerships may claim for refund of German withholding taxes (Section 50d (1) through (6) with sections 43 et. seq. and 50a ITA), if partnership treated as tax intransparent by state of residence Details in BMF letter ruling dated 26 September 2014, paragraphs 1 and 2.1/2.2

Question 4

How is the taxation between the Contracting States regulated?

Accepted Answer

In general: taxation right for the state of residence (worldwide income principle) However: additional (limited) taxation rights for the state of source may also apply (state of source principle). Result: If the state of source has the right of taxation as well (double taxation), the state of residence shall exempt the income (exemption method) or credit (deduct) the foreign tax (credit method) (see Art. 23 A, B OECD-MTC). "..may be taxed in that other state.."Allocation with open legal concequence-both state have the right of taxation-double taxation is not eleminated by norm-elimination by using exempt or credit method in the state of residenceExample: Art. 6, 7 "..may also be taxed in .. shall not exceed.."Allocation with limited taxation right in the state of source-norm allocates to both state a taxation right, but taxation right of the state of source is limited -double taxation is not avoided-elimination by using the method articlesExample: Art. 10, 11 ".. shall be taxable only in.."Allovation with final legal consequences-Distribution norm allocates only to one state the exclusive taxation right-Immediate solution of the taxation problemExample: Art. 12

Question 5

OVERVIEW OF IMPORTANT ALLOCATION NORMS

Accepted Answer

Immovable property Art. 6 : State of source principle Business profits Art. 7: State of residence of the companyExemption: PE : State of the permanent establishment! Dividends Art.10: State of residence; witholding at source possible Interrest Art. 11: State of residence, witholding at source possible Royalities Art. 12: State of residence; (in the most DTT a withholding at source possible) Capitalgains Art. 13:-Immovable property: state of residence principle-Moveable property: State of permanent establishment-othter property: state of residence Income from employment Art. 15: state of residence-Exercised in the contracting state: state of activity-Exemption: less than 183 days: state of residence

Question 6

what is a subject to tax clausel?

Accepted Answer

Der Rechtsbegriff Subject-to-tax-Klausel (deutsch auch Rückfallklausel) entstammt dem internationalen Steuerrecht, wo er innerhalb von Doppelbesteuerungsabkommen vereinbart wird.[1] Zwar enthält das OECD-Musterabkommen keine solche Klausel, gerade Deutschland hat sie aber in vielen (neueren) Doppelbesteuerungsabkommen meist als Ergänzung zum Methodenartikel (in der Regel Art. 24 nach OECD-Musterabkommen, beispielsweise im Rahmen eines Zusatzprotokolls) vereinbart. Ein Beispiel ist das DBA mit Italien (Zusatzprotokoll zu Art. 24). Während Doppelbesteuerungsabkommen grundsätzlich das Ziel der Vermeidung (bzw. Verringerung) tatsächlicher Doppelbesteuerung haben, richtet sich eine im Abkommen vereinbarte Subject-to-tax-Klausel gegen virtuelle Doppelbefreiung. Diese würde entstehen, wenn der Staat, dem laut DBA das Besteuerungsrecht zustehen würde (in der Regel der Quellenstaat) tatsächlich keine Besteuerung vornimmt, während die Einkünfte im anderen Staat (in der Regel der Ansässigkeitsstaat) dem DBA folgend freigestellt werden würden. Die Subject-to-tax-Klausel regelt in diesem Fall, dass der Wohnsitzstaat eine Besteuerung vornehmen darf. Sie wird daher auch als Rückfallklausel bezeichnet, die das Entstehen weißer Einkünfte verhindert. Im nationalen Steuerrecht bestehen ebenfalls verschiedene Rückfallklauseln, insbesondere § 50d Abs. 8 bis 12 EStG.

Question 7

Exemtion Method vs. Credit Method (Method Article)

Accepted Answer

Exemtion Method Art. 23A OECD: Paragraph 1: Exemption of income from tax base in state of residence Paragraph 2: Dividend and Interest Paragraph 3: Possibility of progressivity proviso in national tax law (Section 32b (1) No. 2 ITA) Paragraph 4: Avoidance of white income in case of double exemption Credit Method ARt. 23B OECD: Paragraph 1: Credit of withheld taxes by state of source in state of residence; definition of maximum credit amount Paragraph 2: Possibility of progressivity proviso in national tax law (Section 32b (1) No. 2 ITA) Max. Credit Amount = foreign income (state of source)/taxable income (state of residence) * individual tax (tarifl. ESt)

Question 8

What is the definition of the term "permanent establishment"?

Accepted Answer

National tax law:Sec. 49 paragraph 1 No. 2a ITA in conjunction with Sec. 12 AO (commercial permanent establishment) According to Sec. 12 AO (German Fiscal Code): · Fixed place of business or facility, that serves activities of the enterprise· List of examples (not a final list “especially“)· see Sec. 12 S. 2 No. 1 - 8 AO OECD-MTC:Art. 5 paragraph 1 - 7 OECD-MTC According to Art. 5 OECD-MTC: Paragraph 1: General definition of the term “permanent establishment“: Fixed place of business through which the business of an enterprise is wholly or partly carried on. Paragraph 2: List of examples (not a final list, “especially“) Paragraph 3: Building site or construction or installation project (> 12 months) Paragraph 4: Exemption catalogue (list of negative examples) Paragraph 5 and 6: Representative-permanent establishment Paragraph 7: Anti-fiscal unity clause for affiliates Fixed place of business through which the business of an enterprise is wholly or partly carried on.Fixed place of business: locally fixed place of business (e.g. office) expected or actual duration of use of at least 6 months activities of preparation for creating and acquiring the fixed place of business do not justify a permanent establishment Business of an enterprise: · Basically, any commercial activity within the meaning of Sec. 15 paragraph 2 ITA · Activity must be a part of the enterprise, i.e. the enterprise has to exert its activity through the fixed place of business

Question 9

What ist AOA?

Accepted Answer

Authorized OECD Approach Article 7 (3) OECD MTC: “Where in accordance with paragraph 2, a Contracting State adjusts the profits that are attributable to a PE […] and taxes accordingly profits of the enterprise that have been charged to tax in the other State, the other State shall […] make an appropriate adjustment to the amount of the tax charged on those profits.” Paragraph 2: Authorized OECD Approach· direct method: separate accounting· indirect method: fractional apportionment There are different methods to calculate the income of a PE, especially with reference to intercompany transactions (“arm’s length principle”). Paragraph 3: same taxation base in both Contracting States even in case of different allocations of PE income by need for consequential amendments of tax base in other country· in theory: first State to change taxation base for PE income forces other State to adjust their respective taxation base as well· in practice: consultation between Contracting Parties AOA: Allocation of PE profits different views of allocation Attribution of Profits to Permanent Establishments (nachfolgend Betriebsstättenbericht) veröffentlicht. Dieser beinhaltet den Authorised OECD Approach, der die Grundlage für eine umfangreiche Neuregelung der abkommensrechtlichen Gewinnzurechnung bei Betriebsstätten gemäß Art. 7 OECD-MA und des OECD-Musterkommentars (OECD-MK) bilden wird.

Question 10

withholding tax scheme

Accepted Answer

Gross dividend: 100./. wht (sos) . 25=net dividend I: 75./. wht (sor) 15 (regular 30 wht (sor) - 15 creditable wht DTT Art.2 paragraph b)=net dividend II: 60+reclaimable wht (SOS): 10 (25-15 allowed wht DTT=Dividens after taxes 70 (100 - 30 State of residence wht)

Question 11

DIVIDENDS - PARENT-SUBSIDIARY DIRECTIVE Relief at source (Quellensteuererleichterung)!

Accepted Answer

„Normal“ case: · withholding tax on dividend payment in state of source · taxation with partial tax credit in state of residence (no tax exemption (§ 8b (4) CITA)) P/S case (without relief at source) · withholding tax on dividend payment in state of source (§ 43 ITA) · P/S Directive exempts such dividends from taxation in state of source and residence (>10% participation)- tax exemption in state of residence (§ 8b (1) CITA)- reclaim for taxes in state of source (§ 50d (1) ITA) P/S case (with relief at source (§ 50d (2) ITA) Antrag an das Bundeszentralamt für Steuern) · no withholding tax on dividend payment in state of source (§ 43b ITA) · tax exemption in state of residence (§ 8b (1) CITA)

Question 12

What is a asset deal or sale of a pe as such?

Accepted Answer

Commentary to the OECD Model Tax Convention, Article 13, number 25:► 25. The paragraph makes clear that its rules apply when movable property of a permanent establishment is alienated as well as when the permanent establishment as such (alone or with the whole enterprise) is alienated… Asset deal vs share deal: ► Asset deal: sale of each individual asset at level of PE to new owner-movable property: country of PE (Art. 13 (2) MTC)-immovable property: country of property (Art. 13 (1) MTC) ► Share deal: sale of shares at level of parent company-not possible at level of PE, PE is part of broader transaction-shares: country of residence of alienator/seller (Art. 13 (5) MTC)

Question 13

What is subject-to-tax clause?

Accepted Answer

Germany as state of residence generally makes use of exemption method in its DTTs Income may not be taxed in state of source · Income may not be taxable income · Income may be tax-exempt · Tax payer has not filed tax returns declaring the income in question In order to prevent double tax exemption (“white income”), recent German DTTs contain subject-to-tax clause, i.e. exemption from German tax base only if income is in fact taxed in state or source

Question 14

What is a switch over clause?

Accepted Answer

Qualification conflicts, i.e. income is qualified differently by contracting DTT states, may lead to double tax exemption. In order to prevent this, switch-over clause allows state of residence to switch from exemption to credit method. · Section 23A (4) OECD-MTC · Section 20 (2) Foreign Tax Act (FTA) This way, it is ensured that income is taxed once

Question 15

TREATY OVERRIDE

Accepted Answer

DTTs are lex specialis in (German) national tax law. Possibility to get overruled by subsequent (unilateral) change in tax law (“Treaty override”). Constant jurisdiction allows treaty override- breach of contract vis-a-vis the other contracting state-tax payers not entitled to legal claims based on treaty override Recent change in constant jurisdiction:-Federal Fiscal Court (“Bundesfinanzhof”) sees treaty overrides in section 50d (8) (BFH I R 66/09; 10 January 2012) and (10) (BFH I R 4/13, 11 December 2013) ITA potentially not in line with German Basic Law-German Federal Constitutional Court (“BVerfG”) however did not object recently (2 BvL 1/12, 15 December 2015). This ruling additionally states that treaty overrides also apply to subsequent treaties! Discuss: “pacta sunt servanda” vs. national sovereignty

Question 16

Treaty shopping

Accepted Answer

DTTs are bilateral, but may differ between different states. “Treaty shopping”: tax planning to make use of beneficial DTT rules, however, there are anti-avoidance rules / treaty override in place (see also BEPS)

Question 17

AOA

Accepted Answer

Mit der Umsetzung des Authorized OECD Approach (AOA) werden Betriebsstätten aus steuerlicher Sicht mit rechtlich selbstständigen Unternehmen gleichgestellt. Dies hat gravierende Konsequenzen für die Besteuerung von Gewinnen im internationalen Kontext.Bei grenzüberschreitenden Leistungsbeziehungen mit dem Stammhaus ist nach dem AOA bei der Betriebsstätte der Gewinn nach der direkten Methode zu ermitteln und Leistungsbeziehungen zwischen dem Stammhaus und der Betriebsstätte sind nach dem Fremdvergleichsgrundsatz zu bewerten. Entstehung des AOAFür die Bestimmung des Gewinns einer Betriebsstätte sind grundsätzlich zwei Methoden denkbar: die direkte Methode und die indirekte Methode. Die OECD hat allerdings in ihrem Report vom 24. Juni 2008 festgelegt, dass künftig die Gewinnermittlung der Betriebsstätten nach der direkten Methode erfolgen soll. Dies wurde im AOA festgehalten. Hierdurch sollen Doppelbesteuerungen bzw. doppelte Nichtbesteuerung von Betriebsstättengewinnen vermieden werden. Im Zuge dieser Entscheidung wurde Art. 7 OECD-MA durch das OECD-Update 2010 aktualisiert. Die Betriebsstätte wird aus steuerlicher Sicht einem rechtlich selbstständigen Unternehmen gleichgestellt. Die Ermittlung des Betriebsstättengewinns soll in zwei Schritten erfolgen: Im ersten Schritt wird eine Funktions- und Risikoanalyse durchgeführt. Dabei werden die Funktionen, die Wirtschaftsgüter sowie die Chancen und Risiken zugeordnet sowie die Rechte und Verpflichtungen, das Dotationskapital, das Fremdkapital und die Finanzierungsaufwendungen bestimmt. Anschließend erfolgt eine Erfassung und Bepreisung der internen Leistungsbeziehungen mit dem Fremdvergleichspreis. Umsetzung des AOA ins deutsche SteuerrechtMit dem AmtshilfeRLUmsG vom 26. Juni 2013 wurde der AOA durch eine Modifikation in § 1 Abs. 4 bis 6 AStG ins deutsche Steuerrecht implementiert. § 1 Abs. 6 AStG enthält eine Ermächtigung für das Bundesministerium der Finanzen (BMF), eine weiterführende Rechtsverordnung zum AOA zu erlassen. Die Verordnung zur Anwendung des Fremdvergleichsgrundsatzes auf Betriebsstätten nach § 1 Abs. 5 AStG (Betriebsstättengewinnaufteilungsverordnung – BsGaV) ist am 18. Oktober 2014 in Kraft getreten. Die BsGaV ist für die Wirtschaftsjahre anzuwenden, die nach dem 31.12.2014 beginnen (§ 40 BsGaV), wodurch eine Rückwirkung vermieden wird. Ein umfassendes BMF-Schreiben zur Anwendung des § 1 AStG wird für 2015 erwartet.

Question 18

AOA

Accepted Answer

Darüber hinaus ist die Gewinnabgrenzung zwischen Stammhaus und Betriebsstätte durch die Umsetzung des sog. Authorized OECD Approach (AOA) in nationales Recht nun wie bei Kapitalgesellschaften unter Berücksichtigung des Fremdvergleichsgrundsatzes vorzunehmen. Somit sind auch innerhalb eines Einheitsunternehmens, d.h. bei Geschäftsbeziehungen zwischen Stammhaus und Betriebsstätte, fremdvergleichskonforme Verrechnungspreise zu ermitteln.

Oberseminar Steuerrecht (Fach) / International Tax Law (Lektion)