Important changes and developments in German double tax treaties
1. New double tax treaty between Germany and the Netherlands: tax authorities now bear burden of proof regarding tax- evading or tax-avoiding arrangements
A new Double Tax Treaty (DTT) has been in place between Germany and the Netherlands since 01 January 2016.
Art. 23 of the DTT introduces an important change. Art. 23 stipulates that the convention shall not be interpreted to mean that each contracting state is prevented from applying its domestic legal provisions on the prevention of tax evasion or tax avoidance. From the German perspective, this applies in particular to Sec. 50d para. 3 of the German Income Tax Act (Einkommenssteuergesetz, EStG). Sec. 50d para. 3 EStG imposes a general duty to withhold German tax on dividend and licence payments. A reimbursement or exemption applies to this tax pursuant to German law (Sec. 43b EStG) or pursuant to the new DTT, unless the arrangements in question are designed to avoid or evade tax. In such case, according to Sec. 50d para. 3 EStG the burden to prove that the arrangements are not intended to avoid or evade tax lies with the foreign tax company. In order to evaluate the validity for a reimbursement or exemption sentence 2 of Sec. 50d para. 3 EStG stipulates that a group assessment does not apply but the assessment of the single company which applies for a reimbursement or exemption. Hence from a German tax perspective it is necessary that the single company physically exists in terms of premises, staff and equipment. Therefore companies only generating passive income without any relevant substance, e.g. non-operative holding-companies, are not entitled for a reimbursement or exemption even if they are affiliated to operative companies.
According to the protocol to Art. 23 it is now stipulated that Germany treats Dutch affiliated companies from a German tax perspective under Art. 23 DTT on a consolidated basis. Therefore from a German tax perspective it is relevant whether all consolidated companies together meet the requirements for reimbursement or exemption purposes. Although it is not clear if the term “Dutch affiliated companies” only includes a group of consolidated companies where every company is located in the Netherlands or if a group of consolidated companies can include companies located abroad, this offers new opportunities for international tax structuring in order to avoid the application of Sec. 50d para. 3 EStG.
Furthermore another change is introduced by Art. 23 of the DTT. According to the protocol to Art. 23 it is now stipulated that if a natural person domiciled in the Netherlands holds shares in a company established in Germany via one or several companies established in the Netherlands, Sec. 50d para. 3 EStG does not apply, unless the German tax authorities can prove that the aforementioned Dutch company is used as an intermediary for tax reasons. Failing this, no tax can be withheld in Germany. In effect, the DTT Germany-Netherlands changes the requirement for the taxpayer to prove that no arrangements were made to avoid or evade tax regarding the German withholding tax. The burden to prove that such arrangements have been made lies with the German tax authorities instead.
2. New DTT between Germany and Japan
A new Double Tax Treaty was signed between Germany and Japan on 17 December 2015.
Pursuant to Art. 10 of the DTT, the withholding tax rate for dividends is to be reduced under certain circumstances. For participations of at least 10 % which are held for a minimum of 6 months, the withholding tax rate is to be reduced to 5 %. Participations which are held for 18 months and amount to at least 25 % will be tax-exempt. A zero rating system is also to be introduced for licence fees.
In all other respects, the DTT is generally in line with the recommendations of the OECD Model Convention. For example, in order to define the taxation rights on business income, particular consideration is to be given to the OECD guidelines regarding the allocation of income amongst associated enterprises (authorized OECD Approach). Furthermore, provisions to avoid tax evasion and avoidance will prevent the artificial shifting of income to low-tax countries. The DBA is also to contain a binding arbitration provision to ensure that double taxation is avoided in contentious cases. Finally, the provisions regarding the sharing of information in tax matters will be aligned with the current recommendations of the OECD Model Convention.
It is not known when the new DTT between Germany and Japan will enter into force. The DTT still requires the approval of the legislative bodies of Germany and Japan.
3. New DTT between Germany and China
On 16 October 2015, the parliamentary procedure for the ratification of a new DTT between Germany and China was initiated in Germany.
The most important changes include the definition of a minimum participation level for the reduced tax at source on dividends. Art. 10 para. 2 lit. a) of the DTT stipulates that the tax rate on profit distributions by Chinese subsidiaries to German parent companies is to be reduced to 5 % if the participation level of the parent company in the subsidiary amounts to a minimum of 25 %. It must be noted in this context that the withholding tax reduction does not apply to Chinese companies which are held by German partnerships.
Another important point to note is that for an activity to be classified as a service permanent establishment a period of operation of at least 183 days rather than the previous requirement of 6 months in any period of 12 months is now required. This constitutes an alignment with the recommendations of the OECD Model Convention.
It is not known when the new DTT between Germany and China will enter into force.