Double taxation and foreign tax law

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Compliance with German tax laws is difficult enough for companies and private individuals alike. There are countless tax laws, administrative instructions and guidelines to be observed, which are also constantly changing. This does not get any easier for clients from abroad, as foreign tax laws are usually very different. Then there is the linguistic challenge. The German (official) language in tax law is characterized by a large number of technical terms and legal definitions that also require a native speaker.

If there are also points of contact with other countries, the range of topics is expanded to include European and international legal provisions and agreements as well as the German  special laws for foreign matters. This requires not only the support of a tax advisor, but also a specialist who is well versed in these topics and who deals with international tax law form German perspective on a daily basis. It’s us!

Our range of services on double taxation and foreign tax law:

  • Consulting regarding  German double taxation agreements , especially if you are a resident abroad
  • Consulting regarding double residence abroad and in Germany
  • Consulting regarding migrations from Germany on exit taxation
  • Consulting regarding domestic shareholders in foreign corporations on add-back taxation and taxation of intermediate companies
  • Consulting and preparation of German tax returns for extended limited tax liability

Those who have their place of residence or the registered office of the company in a foreign country, are subject to unlimited tax liability in their home country (worldwide income principle). Nevertheless, economic contact with Germany can be taxable here. In order to avoid double taxation, countries have concluded bilateral agreements between themselves to avoid double taxation (DTA). Here, the taxation rights are assigned to one of the participating countries (country of residence, source country) on the basis of certain points of contact, and methods to avoid double taxation in the country of residence (exemption method or credit method) are agreed.

Most of these DTAs are based in part on a model agreement of the Organization for Economic Cooperation and Development (OECD), but ultimately agreed individually between the countries. This often leads to national and bilateral peculiarities that differ significantly from the model agreement. Especially with older DTAs, there are often historical peculiarities that always make it necessary to examine the relevant agreement in each individual case

Germany has concluded a worldwide network of DTAs. Nevertheless, there are countries with which Germany has is no double taxation agreement. In this case, the other country will, as a rule, apply its national tax laws to taxation if the connecting factors are fulfilled. In these cases, in order to avoid double taxation from a foreign point of view and for unlimited tax liability in the other country, only national credit regulations of the individual tax laws may be referred to.

There are other foreign facts and circumstances that do not fall within the purview of the Income Tax Act or the scope of a DTA, but the tax offices are nevertheless given an option by the German legislative body to tax - the German Foreign Transaction Tax Act. Here, the German tax authorities are able to apply additional taxation at certain interfaces, for example when the tax liability in Germany ends or certain foreign facts that are actually not subject to German tax legislation.

Those who want to adjourn to another place from Germany or shift residence abroad, should know the pitfalls of expatriate taxation in the German Foreign Transaction Tax Act, or even better, have it checked. In the case of certain assets (company investments), hidden reserves are taxed through so-called personal tax disjunction (exit taxation). The tax legislator assumes that the person moving away has a fictitious sale of the property and taxes a profit that is not achieved at all.

A resident who has a participation in a foreign corporation can also come into contact with the German Foreign Transaction Tax Act. Basically, the corporation is taxed on its profit abroad and the shareholder is only taxed in his country of residence when dividends are paid. Nevertheless, the instrument of so-called additional taxation can result in the shareholder's income being taxed if the foreign company is classified as an intermediate company. If the prerequisites for an intermediate company are met, this income of the domestic shareholder will be added and taxed in accordance with his participation quota, even if there is no distribution (of profits) (additional taxation).

Anyone who is not resident of Germany or does not have a place of business, may still be subject to German taxation. This applies if there is domestic income according to the regulations of the German Income Tax Act (§§ 49 of the German Income Tax Act). From the German point of view, domestic income exists if there are connecting factors in Germany and Germany is the source country of the income. This can be income from domestic permanent establishments, properties, investment income generated in Germany, domestic investments or if working for a German employer.

German withholding tax for foreign supervisory boards, licensors, artists and sportspersons. Special rules also exist for the domestic income of certain professional groups for which German withholding tax applies. This applies to supervisory boards, royalties, artists and sportspersons who are residents of a foreign country, whose activities are deemed to have been performed in Germany. Irrespective of the regulations of the Parent-Subsidiary Directive, the Interest and Licensing Directive or a double taxation agreement, the provisions on the withholding, payment and registration of the German withholding tax by the person liable for payment under the German income tax laws are applicable if income is not taxable or is taxed only at a lower rate. Refund of excess taxes withheld is made by the Federal Central Tax Office. Under certain conditions, a certificate of exemption from the German withholding tax can also be issued upon application.

Application for unlimited tax liability under certain conditions. Persons with limited tax liability in Germany must submit tax returns in a special form and content. Partly different regulations apply to these, as for domestic taxpayers. In the context of personal income tax, as a rule, no special private expenses (health and pension plan contributions) can be set and there is no basic tax-free allowance or the joint assessment of spouses or child allowances. Under certain conditions, non-resident taxpayers can, upon application, opt to be treated as resident taxpayers and thereby claim certain tax advantages.

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