In this post, we look at the impact of EU law on DTA and additional taxation. Because the fundamental freedoms should give taxpayers from the EU and EEA countries a right to certain freedoms. For example, the freedom of establishment or the free movement of capital, which also applies to taxpayers from third countries, should be mentioned in particular.

In international tax law, two different perspectives need to be taken into account. On the one hand, there is the double taxation law, which will be considered in more detail later. On the other hand, there is the so-called external tax law. In particular, the prevention of tax evasion by the unilaterally applicable External Tax Act plays an important role here. Special provisions here are the exit tax in § 6 AStG and the additional taxation in § 7 AStG.

1.2.1. Bilateral double taxation law

In addition, the so-called double taxation law is closely linked to international tax law. This can be distinguished according to bilateral and unilateral regulations. The main target is the bilaterally concluded international treaties when there is talk of double taxation law. The purpose of double taxation agreements is to avoid international double taxation by restricting the taxation rights of one State so that the other participating State can have full access to this taxation medium. Double taxation occurs when the same income or assets are taxed several times in different countries.

Important note about double taxation agreements is that they can never establish a taxation right, but only restrict it. Until now, only double taxation has been avoided. It should be noted that a different premise will apply in the future. Because by avoiding double taxation, a non-taxation of substrate occurs in part if a country is assigned taxation, which leaves the relevant situation untaxed in principle. This is to be changed in the future to the effect that a definitive one-time taxation occurs.

In the case of double taxation agreements, several procedures for avoiding taxation are available. Under Article 23 of the OECD Model Convention, the exemption method is found under Article 23A and the credit method under Article 23B. The exemption completely excludes income in a country from the tax base. On the other hand, the tax paid abroad is counted against the tax payable in the country, as the name suggests, and thus reduces the tax payable. However, a refund cannot be made if the tax paid abroad exceeds that payable domestically.

1.2.1. Unilateral double taxation law

Finally, the unilateral provisions under § 34c (1) EStG apply, according to which foreign paid income tax is to be counted against the German one, if this leads to double taxation and § 26 (1) KStG, which regulates similar things for corporations, to mention. However, the DTA mainly applies to avoid double taxation.

Now we have just mentioned double taxation law. It is also possible for several states to conclude a double taxation agreement with each other, which would constitute a so-called multilateral agreement. As has already been mentioned, the avoidance of double legal taxation is also the primary objective here.

In order to simplify the contract negotiations of the individual states, the OECD has developed a so-called model agreement for this purpose, which usually serves as a basis for the countries in their negotiations on new DTAs. It attributes taxation rights to either the State of residence or the State of source mainly through distribution standards for the different types of income, as reflected in Articles 6-22 of the OECD Model Convention. The State of residence is the State in which the company has its registered office or the person has its domicile. On the other hand, the source state represents the state in which the income is earned.

First of all, the terms in the DTA must be interpreted autonomously, i.e. according to a European and thus uniform understanding as they are listed in Article 3-5 OECD-MA. Since some terms are not defined, they must be defined by a national interpretation of the terms. If, coincidentally, there is no taxation on certain income in any of the participating states in the respective states, this is called white income. Nevertheless, there is a strong fight against such arrangements, because for taxpayers this is logically a legal way to a relatively favorable taxation. Recent agreements therefore include fallback clauses, which usually ascribe taxation of these incomes to the state of residence. This is also called the subject-to-tax clause.

1.3.2.DTA and additional taxation

Additional taxation is a measure that has only recently been accepted by the OECD’s ATAD (Anti-Tax Avoidance Directive). §§ 7-14 AStG deals with the elimination of tax advantages for foreign taxpayers without restriction by the involvement of so-called basic companies. This takes place by means of a reach-through control exerted when the conditions are met. In this context, the paragraphs in question list various abuse provisions for avoiding tax evasion.

The factual requirements are summarized relatively quickly. First of all, according to § 7 (1) sentence 1 and § 7 (2) AStG, a taxpayer must hold more than 50 % of a foreign company. In addition, this company may not earn any active income as it stands in the active catalogue in § 8 AStG. Finally, it is imperative that these incomes are based on a “low” taxation of less than 25%.

The legal consequence is relatively restrictive and should have a very strong preventive effect. Because in such a case, the income is attributed to the tax resident. In addition, the switch-over clause of § 20(2) AStG applies to permanent establishments, which provides for a transition from the exemption method to the credit method if the foreign company is a permanent establishment with interim income.

DBA must be transposed into national law in accordance with Article 59(2) GG. As a result, they must also comply with the EU's fundamental freedoms and can be reviewed by the Commission and the ECJ. Nevertheless, the ECJ has so far been cautious about the DTAs, as these are bilaterally negotiated contracts and are not discrimination on the basis of a single national regulation. Moreover, it continues to be the legitimate right of any state to act with any country, even to its own chosen extent, without a supranational institution imposing anything. In fact, discrimination on the basis of nationality must not be subjected to fundamental freedoms; it is up to the countries alone to negotiate something. This also underlines once again the principle of most favoured nation treatment, which does not justify any objection here in the general framework of the DTA and thus in particular in the case of additional taxation.

Once again, the premise of the EU’s fundamental freedoms must be highlighted, which stipulates that there is no discrimination and unequal treatment of nationals and foreigners and not that all foreigners must be treated in the same way as other foreigners who may have to pay less tax when trading with a particular country.

Furthermore, the EU has not made any rules to avoid international double taxation, this remains in the hands of individual countries.

What then is competence within the EU in the DTA? In particular, the arbitration procedure referred to in Article 273 TFEU is an option for Member States to allow disputes between themselves to be settled by a neutral court. So this is certainly not the desirable scenario, but it sometimes happens that two or more states cannot agree among themselves.

In the context of the well-known Cadbury Schweppes case, there was a dispute concerning the additional taxation. This is also extremely exciting before European regulations.

The Group, headquartered in Great Britain, had dominant indirect shares in subsidiaries based in Ireland. They were located there as financing companies and subject to a tax rate of 10 %. In this case, UK national law provides for an over-adjustment of the profits of the subsidiaries.

Now the question was whether the British parent company (MG) could invoke the fundamental freedoms and in particular the freedom of establishment. For this, the MG first had to meet the personal scope for the EU’s fundamental freedoms, which can be affirmed by Article 54 TFEU. Accordingly, this applies to companies that have been founded in a European state. At that time, Britain was part of the EU and so this can be affirmed. The scope of application must be cross-border and the shares in the TGs in Ireland fulfil this. Article 49 TFEU protects the creation of TG, even if this is done exclusively for tax reasons, since this is not an abusive act alone. This opens up the scope of application of the fundamental freedom.

2.2.1.2. Competition of fundamental freedoms and result

In the case of fundamental freedoms, it is important to note that there may be competition between these. The ECJ has clarified in its case-law that taxpayers can only rely on a fundamental freedom. The freedom of establishment must be applied in the case of holdings, with certain control being exercised over the company’s decisions. On the other hand, the free movement of capital if there are portfolio participations.

Cadbury Schweppes was put at a disadvantage by the additional taxation in the UK because she was taxed for the profits of another company abroad. The fundamental freedoms are intended to bring the situation into line with a purely domestic case. The justification of taxation states that the addition is legal if purely artificially created structures are to achieve the tax reduction. In this case, no actual exercise of an economic activity as protected by the freedom of establishment is apparent. The additional taxation is therefore justified. Proportionality must also be respected and thus the taxpayer must present proof to the contrary for the economic activity.

2.2.2. Case C-298/05 Columbus Container Services

The case of Columbus Container Services concerned shares in a Belgian limited company that held German taxpayers in their private assets. The question was whether the freedom of establishment does not protect against the collection of German income tax, since Belgium has the right to tax the profits of the limited partnership as a permanent establishment state. However, in this case, the so-called switch-over clause of § 20 paragraph 2 AStG intervenes. This stipulates that in the case of permanent establishments, instead of the exemption method, a switch must be made to the offsetting method in order for the taxation of profits to be as high as that of a German limited partnership. This is ensured by the equivalence of the exemption methods by the ECJ.

The impact of EU law on DTA and additional taxation was clearly presented in this article. Because fundamental freedoms, as part of the EU’s primary law, also have an enormous influence on national legislation. In addition, the EU has the task of creating equivalent conditions in cross-border cases with purely domestic cases. The DTA and the additional taxation are two ways in which this can be harmonized. The DTAs have the task of creating bilateral rules to avoid double taxation, whereas the additional taxation is intended to prevent the tax reduction by shifting profits to other low-tax countries. In this context, the role of the fundamental freedoms as a safeguard mechanism for taxpayers is that taxation is not wrongly imposed.