The new treaty between the Federal Republic of Germany and the United Kingdom of Great Britain and Northern Ireland to prevent double taxation
Birmingham: On 30th December 2010 the agreement signed in London on 30th March 2010 between the Federal Republic of Germany and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income and on capital (abbreviated DTA) entered into force. The previous DTA in its basic version came out in 1964 and was one of the oldest existing DTAs with the German nation.
The DTA which has now entered into force is based heavily on the 2008 OECD tax convention model, which simplifies the readability and application of the agreement significantly. There are no real changes of substance in the context of the definitions and therefore also the multi-level residence test.
The right to taxation of income from employment (PAYE) is governed by Article 14 of the new DTA. Of particular importance is the alignment of the 183 day rule to the OECD model standard. Under the previous legal position, the tax year of the other sovereign state (state in which the activity is carried out) was the deciding factor for the assessment under the 183 day rule. For an employee (under the conditions of the treaty legally resident in Germany) it was thus necessary to examine whether he had remained within the UK tax year (which in the UK lasts from 6th April to 5th April of the following year) for more than 183 days. Accordingly, the right to taxation of the employee’s salary, which allotted to UK working days within the UK tax year, was assigned to one of the two countries. Henceforth the new DTA allows for the application of the 183-day rule based on a 12-month period, which begins or ends in the respective fiscal year of the state in which the activity is undertaken. It no longer depends on the possible differing tax years in the contracting states. Supervisory board and board of directors remunerations are regulated for the first time in a separate article. Pursuant to article 15, a double taxation of these earnings will now be avoided by way of an offset of the foreign taxation against German income tax. This also applies to profits from the sale of shares under the property company clause and for the earnings of artists and athletes a change is made from the exemption method (non-assessment of foreign income) to the offset method.
The new DTA also provides that income from the UK is only to be exempted from taxation in Germany, if such income is effectively taxed in the UK in accordance with the DTA. The UK must also therefore observe its right of taxation. Merely the right of taxation is no longer sufficient for the granting of the tax exemption. According to the former DTA, such a subject to tax clause applied only to profits derived from the sale of assets.
Also to be noted in this context are the differing points in time of the application of the new agreement. In Germany the treaty is applicable for all taxes on income from 1st January 2011 onwards. In the UK on the other hand a number of different regulations apply. Thus the new DTA becomes effective for income tax and capital gains tax from the assessment year which begins on 6 April 2011, while for corporation tax it is effective for the financial year starting on 1 April 2011. The new DTA is only applicable for earnings taxation already collected at source commencing from 1st January 2011. With differing allocation of the rights of taxation under the former and the new DTA a double taxation may occur as a result of the application of varying rules in Germany and Great Britain for the transitional period.
