1. 5th Assembly in Washington D.C. 23./24. 10. 2014 Double non taxation Chair: Prof. Dr. Kees van Raad Panelist: Dr. Friederike Grube 1

2. Introduction I Conflict between the principle of residence and the principle of source is the reason of double taxation To eleminate double taxation Germany – as other „continental countries“ - applies the „exemption method“ instead of the „credit method“ Article 23A OECD-Model Convention includes a proposal for the „exemption method“ The „exemption method“ is especially susceptible to the risk of abuse and of double non taxation 2

3. Introduction II Art. 23 A par. 4 OECD-Model Convention proposes a „subject-to-tax“ clause to avoid double non taxation Many Conventions for the avoidance of double taxation with Germany include similar „subject-to-tax“- Clauses (f.ex. US, Norway, Sweden, Denmark etc.) with reference to the state of residence, as well as „switch-over“-clauses („switch-over“ to the credit-method) In addition Germany also applies „subject-to-tax“ clauses in the national provisions in § 50d par. 8 EStG and § 50d par. 9 EStG (socalled „Treaty Override“) 3

4. Introduction III The 1. Senat of the Supreme Tax Court in Germany is convinced that the national „subject-to-tax“- clause in § 50d par. 8 EStG not only violates the Conventions to avoid double taxation with other states and therefore the public international law, but also our Constitution, especially the principle of equality The 1. Senat has therefore brought a case to our Constitutional Court to settle that question: BFH-Beschluss 10. 01. 2012 I R 66/09, BVerfG 2 BvL 1/12 (not yet decided) 4

5. Under the treaty the other state may tax, but does not, and the resident state should exempt BFH, Decision of 19.12.2013 I B 109/13 – The facts: A pilot is resident in G and is employed by an Irish Aircraft-Company. According to the treaty Ireland had the right to tax the salary of the pilot but taxed only a small part of it applying a special ruling in the national law saying that salaries for supplies of services on board of an airplane could only be taxed, if there existed a link to the Irish territory. The German tax authorities wanted to tax the „rest“ of the salary of the pilot according to the national provisions in § 50d par. 8, 9 EStG. 5

6. Under the treaty the other state may tax, but does not, and the resident state should exempt BFH, Decision of 19.12.2013 I B 109/13 – The solution: The tax authorities in Germany had no right to tax the salary of the pilot No right to tax according to the Convention for the avoidance of double taxation with Ireland The conditions for the exemption of § 50d par. 8 EStG were fulfilled and the applicance of § 50 par. 9 EStG neither gave a right to tax the salary 6

7. Under the treaty the other state may tax, but does not, and the resident state should exempt BFH, Decision of 19.12.2013 I B 109/13 – The Consequences: Ireland has changed the national provisions about the taxation of salaries for services supplied on board of airplanes: Now they can be taxed regardless of there being a link to the territory of Ireland or not… Ireland and Germany have introduced a new „subject-to- tax“ clause in Art. 23 par. 2 lit. a in the Convention for the avoidance of double taxation: The salary of a tax payer resident in Germany is only ecluded from taxation in Germany, if the salary has been taxed in Ireland… 7

8. Under the treaty the other state may tax, but does not, and the resident state should exempt BFH, Judgment of 3. 08. 2008 I R 54/07, I R 55/07 – The facts: The taxpayer was the managing director of a Ltd. company established in G; in the years 2001-2005 he also was the managing director of a company „B“ established in Belgium. The taxpayer had an apartment in Belgium as well as in G and he exercised his work for B partly in Belgium and partly in G. The tax authorities of Belgium only taxed that part of the salaries which the taxpayer had received for his work exercised in Belgium; the G. tax authorities therefore taxed the „rest“. 8

9. Under the treaty the other state may tax, but does not, and the resident state should exempt BFH, Judgment of 3. 08. 2008 I R 54/07, I R 55/07 – The Solution: The tax authorities had no right to tax the salary of the taxpayer: According to Art. 16 and Art. 23 par. 1 of the Convention of avoidance of double taxation Belgium/Germany the state of Belgium had the right to tax the salary of the taxpayer and G had to exempt it from taxation. There was no „subject-to-tax“ - clause in the treaty The conditions to tax of § 50d par. 8 EStG and § 50d par. 9 EStG were not fulfilled 9

10. Under the treaty the other state may not tax and the resident state does not tax - for different reasons Court of 1st instance, Düsseldorf, Judgment of 31. 01. 2012 13 K 1178/10 E – The background of the case: German taxpayers working for a German international organization for tecnical foreign aid (GIZ) in foreign countries in the past in fact did not tax their salaries from employment anywhere, neither in their state of residence nor in the state where they exercised their employment. The reasons for the exemption of taxation in the state of residence (normally G) were mereley political. 10

11. Under the treaty the other state may not tax and the resident state does not tax - for different reasons Court of 1st instance, Düsseldorf, Judgment of 31. 01. 2012 13 K 1178/10 E – The facts of the case: The taxpayer worked as an employee for the GIZ in Kasachstan. He had received a salary about 110 000 € in Kasachstan. The GIZ proved, that this salary had not been taxed in Kasachstan. The taxpayer declared that he was only resident in Kasachstan ….. The German tax authorities taxed his salary in accordance with the „paying state principle“ of Art. 19 par. 4 of the Convention of avoidance of double taxation Kasachstan/Germany 11

12. Under the treaty the other state may not tax and the resident state does not tax - for different reasons Court of 1st instance, Düsseldorf, Judgment of 31. 01. 2012 13 K 1178/10 E – The solution: The Court decided that the tax authorities in G had the right to tax the salary of the taxpayer. It was not decisive where the taxpayer was resident It was sufficient that he had received his salary by a german international organisation for foreign aid according to Art. 19 par. 4 of the treaty Kasachstan/Germany The taxpayer accepted this decision 12

13. Under the treaty the other state may not tax and the resident state does not tax - for different reasons Court of 1st instance, Düsseldorf, Judgment of 31. 01. 2012 13 K 1178/10 E – The consequences: The German government now has declared to the public that since the 1. January 2014 all 1 430 employees of this international organization for foreign aid (GIZ) are obliged to tax the full amount of their salaries in Germany according to the „paying state principle“ which is to be applied in all of these cases. 13

14. How to interpret „subject-to-tax“-clauses in treaties to avoid double taxation – Development in the jurisdiction Supreme Tax Court, former opinion in Judgment of the 17. 12. 2003 I R 14/02 – The facts of the case: The taxpayer had the nationality of Canada and Great Britain. She worked for the Canadian Embassy in Germany, where she was resident. According to Art. 19 of the Convention of avoidance of double taxation Canada/Germany of 1981 (paying state principle) Canada had the right to tax the salary but did not do so… The German tax authorities therefore wished to apply the „subject to tax“-clause in Art. 23 par. 3 of this treaty 14

15. How to interpret „subject-to-tax“-clauses in treaties to avoid double taxation – Development in the jurisdiction Supreme Tax Court, former opinion in Judgment of the 17. 12. 2003 I R 14/02 – The decision: The taxpayer won the case in the central question The Court noted that Art. 23 par. 3 of the treaty could not be applied in this case: This provision did not create a right to tax the salary of the taxpayer in Germany just because the tax authorities in Canada did in fact not make use of their right of the „paying state principle“… 15

16. How to interpret „subject-to-tax“-clauses in treaties to avoid double taxation – Development in the jurisdiction Supreme Tax Court, former opinion in Judgment of the 17. 12. 2003 I R 14/02 – The consequences: The tax authorities in Germany feared, that all „subjec-to-tax“ clauses in the treaties to avoid double taxation would now become worthless… New decision of the Supreme Tax Court of the Supreme Tax Court of 10. 10. 2007 I R 96/06: The tax authorities in Germany are only obliged to exempt such income from taxation that in fact has been taxed in the state of source… The federal ministry of finance by now has published a new ruling about the interpretation of „subject-to-tax“ – clauses (20. 06. 2013, BStBl I 2013, 980) 16

17. Thank you for your attention! 17