date | theme

18. December 2020 | Double Taxation Agreement: Purpose / Effect / Benefits

28. December 2020 | Overview of most important articles of the OECD-MA

11. January 2021 | Double Taxation and Double Taxation Agreement

08. June 2021 | Second home: avoid double residence under the DTA

31. August 2021 | Dividends: Taxation under the double taxation agreement (this contribution)

Profits of corporations can be distributed across borders. This is the case when a person receives dividends from another state. Then the question arises as to which country has the right to tax dividends and how far it goes. Both national regulations and, above all, double taxation agreements are important. This article clarifies the distribution of taxation rights with regard to the double taxation agreement. Article 10 of the OECD Model Agreement 2014 is crucial.

Double Taxation Agreements (DTAs for short) are bilateral agreements that serve to avoid double taxation or double non-taxation in cross-border situations. Double taxation occurs when different jurisdictions impose a similar tax on the same taxable entity and taxable object during the same taxation period. Double taxation agreements therefore distribute the taxation rights among the individual contracting states. Nevertheless, double taxation agreements do not fill the taxation rights.

For dividends, this distribution regulates Art. 10 OECD MA. Art. 10 OECD MA differentiates fundamentally between the paying state (source state) and the recipient state. The term dividend is defined in Article 10 III OECD MA. There, certain examples are given and, incidentally, reference is made to the qualifications of the source state.

Art 1o I OECD MA establishes the basic rule that the taxation right lies in the recipient country. This is the country in which the receiving partner is resident. However, Article 10 II OECD MA makes exceptions to this principle. Accordingly, the taxation right lies under certain conditions and up to a certain amount also in the paying state. Nevertheless, it is not specified whether the tax is collected there by deduction or assessment. The receiving State shall charge or exempt the tax of the paying State (Art. 10 I in Art. 23 A or B).

2. taxation of dividends by the source state

The source country, i.e. the country of residence of the distributing company, can also tax dividends. This already results from Art 1o I OECD MA. Nevertheless, there are different maximum withholding tax rates in Article 10 II OECD MA, which the source state must adhere to, which amount to 15 or 5 percent. For box dividends, according to Art. 10 II OECD MA, different rules should apply compared to other dividends. For these, the withholding tax rate should not exceed 5 % on the gross income of the dividend. For other dividends, however, the withholding tax rate should be 15 % of the gross income. Box dividends are dividends paid on the basis of qualifying investments. It is therefore necessary that the beneficial owner is, however, a company not a partnership directly owning at least 25 % of the capital of the disbursing company.

Other participations are therefore those in which at least one condition of Art. 10 II lit. a OEECD MA is missing. Entrepreneurial investments are therefore also better placed than free float investments. The reason for this is that there is generally no multiple burden for the other holdings. Similarly, in national law, the box privilege of § 8b KStG applies only to box dividends.

Basis of assessment of the maximum withholding tax is the gross income. This represents the pure distribution without deduction of any expenses and without taking into account the personal circumstances of the shareholder. As a result of the use of the gross amount, the low withholding tax may exceed the tax on dividends in the country of residence, especially in the case of high expenses. This can result in an offsetting overhang, since the country of residence of the shareholder is obliged to exempt or offset the foreign tax under Art. 23 A or B OECD MA. The overhang is regularly countered by the fact that the withholding State allows the deduction of expenses and therefore taxes the net amount or the country of residence deducts the withholding tax altogether.

For investments acquired by companies, Art. 10 OECD MA has priority over Art. 7 OECD MA. Dividend income of a company from its business activities is therefore subject to the rules on dividend taxation. Nevertheless, Art. 10 OECD MA resigns after Art. 7 OECD MA if the dividend recipient has a permanent establishment in the country of residence of the company and the dividends belong to the profit of that permanent establishment. Taxation of the dividend is not limited to a percentage of the gross dividend. However, the profit determination rules apply to permanent establishments and the source state is obliged to treat the permanent establishment equally with domestic companies. Therefore, the net profit is taxable on a regular basis. Consequently, Article 7 OECD MA and Article 10 II OECD MA are excluded. Therefore, it must be checked in individual cases whether a permanent establishment is located in the source country.

3.2. Dividends for Art. 10 OECD MA do not apply

Dividends paid by a company domiciled in a third country are not subject to Article 10 OECD MA, but to Article 21 OECD MA. The sale of shares is also subject to Article 13 OECD MA instead of Article 10 OECD MA. Consequently, these standards take precedence over Article 10 OECD MA and must therefore be observed in this context.