The new Germany/UK Treaty
- The German Perspective
IFA Trilateral Meeting 3 November 2010
Jan Brinkmann
Overview

German treaty policy

The Germany/UK Treaty

Anti avoidance
— ‘Subject to tax’ condition for German tax exemption
— Limitation of relief for income/gains not taxed in the UK on ‘remittance
basis’
— Anti treaty shopping provisions
— ‘Switch-over’ rules

Other changes
— Reduction of German dividend withholding tax
— Pensions, annuities and similar payments
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German treaty policy
German treaty policy

Objectives
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not only avoidance of double taxation
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but also avoidance of
— double non-taxation,
— tax evasion and
— tax avoidance
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German treaty policy (2)

Methods for the avoidance of double taxation

Exemption method (subject to the right to take exempt income/gain into
account when determining the tax rate)
— e.g. (active) business income, income/gains from immovable property,
income from employment
— also domestic exemptions (e.g. dividends)

Credit method
— e.g. portfolio dividends, interest, royalties
— preferred method for treaties with low tax jurisdictions
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German treaty policy (3)

Switch over clauses
— non-active business income, conflicts of qualification, double nontaxation
— treaty rules and domestic rules
— problem: underdeveloped domestic tax credit rules

Mutual agreement and arbitration
— general willingness to provide for MAP/arbitration clauses along the
lines of article 25 OECD-MC (2008)
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The Germany/UK Treaty
Anti avoidance
Subject to tax clause

Exemption of UK source income from German tax

Only if ‘effectively taxed’ in the UK (article 23 (1) a))

Applies to all items of income and gain

Example
—
German-resident individual invests (whether directly or through transparent
funds) in UK real estate
—
Effective elimination of UK tax charge by personal allowance
—
Non-taxation by virtue of personal allowances should not be caught under
subject to tax clause.
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UK remittance basis and relief from German tax at source

The UK as ‘low tax jurisdiction’ for resident but non domiciled persons

New ‘limitation of relief’ provision (article 24)

All items of German source income and gain that are taxable in the UK in
principle under the treaty but which are not effectively taxed in the hands of
a UK resident because the UK resident benefits from ‘remittance basis’
taxation will not be relieved from source taxation in Germany

likely to have a broader effect than existing provision (article II (2))
— applies to income and gains (from German sources) benefitting from
remittance basis taxation in the UK
— no longer expressly conditional on the income being subject to tax in
the other territory under the treaty
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UK remittance basis and relief from German tax at source (2)

Practical relevance

investment income from German sources (as under old treaty)

capital gains from alienation of shares in German companies (1% minimum
holding)

employment income from German sources (dual contract cases)

in addition: for former German tax residents:
— remain subject to German tax for 5 years with certain items of
income/gain
— capital gains from alienation of German real estate, shares, debt
instruments
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Anti treaty shopping

Main purposes clauses in articles on dividends, interest, royalties and other
income

Novelty from a German perspective

Germany traditionally attacks treaty shopping under – rather mechanical domestic rules

domestic rule has been challenged by European Commission
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Anti treaty shopping (2)

Joint declaration
‘[…] it is understood that this Convention shall not be interpreted to mean that a
Contracting State is prevented from applying its domestic legal provisions on
the prevention of tax evasion or tax avoidance where those provisions are used
to challenge […] an abuse of the Convention.
[…] an abuse of the Convention takes place where a main purpose for entering
into certain transactions is to secure a more favourable tax position […]’
-> less mechanical approach than under German domestic law
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‘Switch-over’ rules for German relief from double taxation

Switch over form exemption to credit method (article 23 (1) c) and e))

for passive business profits of a UK permanent establishment

dividends where underlying profits are derived from passive income
— treaty exemption is of little importance as domestic participation
exemption and Parent Subsidiary Directive apply
— relevant where domestic exemption does not apply and minimum
holding periods (Parent Subsidiary Directive) are not satisfied


categorisation/attribution conflicts that would otherwise have resulted in
‘white income’ (unless conflict is resolved under MAP)
German domestic law provides for unilateral switch over to credit method for
categorisation/attribution conflicts
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Third country permanent establishments

Third country permanent establishments of German enterprises
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Relief from UK source tax available only if combined tax in Germany and
third country is not less than 60% of German tax (section 3 of the protocol)

Even if conditions for above relief are not satisfied, UK withholding tax is
limited to 15%

Anti avoidance rule does not apply to income derived from an active
conduct of a trade or business

Improvement on current position where ‚subject to tax‘ condition may result
in denial of treaty protection
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The Germany/UK Treaty
Other changes
Dividend withholding tax



reduction of German source taxation to

5% for dividends paid to a company that holds at least 10%of the
companies capital

10%for dividends paid to qualifying ‚pension schemes‘

15% in all other cases
No specific rules for REIT dividends

15%/10% rate applies

5% rate effectively excluded/penalized under domestic law
German source income on profit related debt instruments may be subject to
WHT (section 2 of the protocol)
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Pension, annuities and similar payments

Significant deviation from OECD-MC (2008)

Rule: State of residency

Exceptions
— payments under social insurance legislation
— payments for which tax relief on contribution was granted for more than
15 years

Background
— Change of German system regarding taxation of pensions


15 years period appears to be compromise
New German policy?
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Mutual agreement procedure
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Mutual agreement procedure (article 26)
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Broadly following the OECD-MC (2008) model

Mandatory arbitration clause
— Incentive to reach agreement during MAP within reasonable time (2
years)
— No arbitration in case a decision has been rendered by a court or an
administrative tribunal
— Procedure shall be agreed upon by competent authorities.
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© Freshfields Bruckhaus Deringer LLP 2010
This material is for general information only and is not intended to provide legal
advice.
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