• Service: Tax, International Tax
  • Type: Regulatory update
  • Date: 10/2/2013

Germany - Guidance on subject-to-tax clauses under tax treaties 

October 2: Germany’s Federal Ministry of Finance in July 2013 published guidance containing its position concerning whether origin-of-income clauses qualify as subject-to-tax clauses under Germany’s income tax treaties.

In a 2007 Federal Tax Court case, an individual held shares in a limited partnership established under Italian law. The limited partnership changed its legal form to a corporation, and the reorganization was implemented consistent with Italian tax law at book value and without the realization of gains (i.e., it was tax exempt in Italy).

The German tax authority treated the reorganization as a taxable sale transaction, and concluded that absent Italian taxation and according to the origin-of-income clause in the Protocol to the Germany-Italy income tax treaty, Germany had the right to tax the gains arising from the sale. The Federal Tax Court agreed with this treatment.

In the July 2013 guidance, the German tax authorities addressed the requirements as to the proof of taxation of the income in the foreign country, finding that proof generally must be provided by submitting: (1) the tax assessment notice of the foreign tax authority as well as proof of payment of the tax; or (2) proof of payment and a copy of the tax return; or (3) a certificate proving that the tax was actually withheld.

Read an October 2013 report [PDF 1.5 MB] prepared by the KPMG member firm in Germany: German Tax Monthly (October 2013)

Other topics

Also discussed in the KPMG report:

  • Treatment of pre-tax group excess transfers as profit distributions might be unconstitutional (I R 38/11)
  • Relevant point in time for controlling entities to be engaged in commercial business activities. retroactive recognition of profit and loss absorption agreements for tax purposes possible for all open cases (I R 40/12)
  • Non-Resident tax liability in case of lease-out of movable property in Germany (I R 22/12)
  • Decision of the Lower Tax Court of Lower Saxony on detrimental shareholder loans in the context of the earnings stripping rules (6 K 226/11)

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