Analysis of New Tax Treaty Between Germany and U.K
Germany and U.K
The Federal Republic of Germany and the United Kingdom of Great Britain and Northern Ireland signed a new tax treaty on 30 March 2010.1 This treaty for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital (“DTT”) will replace the treaty of 1964. In the main, the DTT corresponds to the OECD Model Tax Convention 2008. There are important changes affecting the international workforce, which we examine briefly below.
The new DTT with the United Kingdom still requires the ratification of both contracting states in order to become effective.
New Wording of the 183-Day Rule and Relevant Period
The 183-day rule has been adjusted to the wording of the OECD Model Tax Convention. The period for counting the 183 days of presence in the other contracting state has thus been modified. It now refers to any 12-month period starting or ending in a tax year – previously it was related to the tax year. This means that more taxpayers will be taxed in the host country (other contracting state).
KPMG Note
Under the old wording, it is possible to avoid taxation in the host country by spreading an assignment over two tax years. This option will not be available once the new treaty goes into effect. Also this new criterion can only be fully tested after 12 months after the end of the tax year.
Subject to Tax Clause
The article on the elimination of double taxation has been amended for Germany as country of residency. Previously Germany exempted certain income from taxation if the United Kingdom was allowed to tax this income under the DTT. With the new wording, Germany will only exempt income that is effectively taxed in the United Kingdom on the basis of the DTT. How this rule will be applied in detail remains to be clarified by a protocol or guidance from the German tax authorities.
As previously, the DTT includes a remittance basis clause, now in article 24. The source state is not required to grant relief in respect of the amount of the income that is not taxed in the other state because it is not remitted to that state.
Other Characteristics of the New Treaty
The general withholding tax rate on dividends is 15 percent. This rate is reduced to 5 percent where a parent company located in one contracting state holds at least 10 percent in its subsidiary located in the other contracting state. It is reduced to 10 percent for pension schemes. In contrast, no withholding tax is levied on interests and royalties – the country of residence of the beneficial owner has the exclusive right to tax these.
An article on offshore activities has been newly introduced.
At the same time, the regulation for independent services has been abandoned. These are now qualified as business profits.
Artists and sportsmen may still be taxed by the state in which they perform. There is a new exception from that rule for performances financed from public funds of the artist’s or sportsman’s country of residence. This income may only be taxed by the country of residence.
By way of derogation from the OECD Model Tax Convention, the new DTT contains numerous anti-abuse clauses especially for dividends, interests, and royalties.
Next Steps
KPMG in Germany will keep readers updated once the new DTT has been ratified and will provide information about when it will go into effect.
Source: KPMG
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