The regulations for the global minimum taxation – specifically the “taxation” to 15% – must be implemented on the one hand by the financial administration of the country in which the parent company is located. On the other hand, other countries can also be entitled to collect the so-called “top-up tax”. The global minimum tax therefore leads to a redistribution of the taxing substrate. This distribution takes place independently of the established and finely balanced allocation of taxation rights by double taxation agreements (DTAs). This raises the question of the compatibility of global minimum taxation with double taxation agreements. We clarify where infringements of agreement law can be considered and how they could be prevented.

1st issue of compatibility of the global minimum tax with DBA

Double Taxation Agreement (DTA) assigns taxation rights to the states participating in the international treaty. Taxation within the framework of the global minimum rates takes place independently of the regulations made in the DTA. Thus, either the low-tax country or another country is entitled and obliged to tax the low-tax income high at the minimum tax rate of 15 %. The question therefore arises whether the new allocation of taxation rights is compatible with the DTA.

2. applicability of the double taxation agreement to the global minimum tax

2.1. Global minimum tax is not taxation sui generis

In order for the compatibility of the global minimum taxation with the double taxation agreement to matter at all, the DTA would first have to be applicable. If the DTA is applicable, it is to be used to determine whether, for example, the German Treasury is entitled to tax part of the profits of a foreign company. One of the problems is that, from an economic point of view, the minimum tax is a tax on the profits of a company established in the low-tax state. However, it is raised at the parent company.

The global minimum taxation could be a system that applies alongside the regulations of the DTA. Then it would be a taxation sui generis, which makes a reallocation. On the other hand, there is the argument that the double taxation agreements do not have a limited scope of application. Nor do the regulations on global minimum taxation provide for a separate legal framework that would escape the scope of a double taxation agreement and stand by it.

Furthermore, it is argued that the global minimum tax is not a typical income tax, but an alternative tax to the minimum burden of the pool of low-taxed profits. For this reason, the scope of the DTA is not open. This argument is based on the violation of the tax subject principle and the separation principle by the minimum tax. However, the personal scope of the agreement does not depend on the taxpayer, but on the tax creditor, i.e. on the respective contracting state.

2.2. Personal scope

DTA apply to persons resident in one or both Contracting States (Article 1 OECD-MA). is resident in a Contracting State, who is taxable there (Article 4, paragraph 1, OECD-MA). For residency, the tax type is irrelevant. Thus, the personal scope of application is opened.

2.3 Substantive scope

According to Article 2(4) OECD-MA, a double taxation agreement applies not only to income tax, corporate tax, property tax, real estate tax, business tax, but to all taxes of the same or similar nature that will be levied in the future in addition to those mentioned. The global minimum tax could be a typical income tax. Then it could be argued that the tax object of the global minimum tax – i.e. the profit of the foreign company – does not count as income of the tax creditor – the domestic parent company. Against this background, an income tax could be rejected. In any case, a property tax or a tax of a similar nature must be assumed. Consequently, the scope of application is also open.

2.4. Priority agreement included

The implementation of the global minimum tax by the member states could be understood as an implied agreement of the priority of the minimum tax over the regulations of a DTA. However, implementation alone is a political declaration. The double taxation agreements, on the other hand, are international treaties. Their amendment is therefore subject to the requirements of the Basic Law. According to Article 59(2) GG, an amendment to the Agreement requires parliamentary participation. If the minimum taxation is contrary to the provisions of the DTA, an implied agreement without parliamentary participation would not remedy the opposition.

3rd Global Minimum Tax Violates DTA Regulations

3.1. Breach of Article 7(1) OECD-MA

3.1.1. Regulation of Article 7(1) OECD-MA

The global minimum tax could violate Article 7(1) OECD-MA. It provides that profits of a company of a contracting state may be taxed only in that state, unless the profits are attributable to a foreign permanent establishment of a company. Therefore, in principle, the country of residence is entitled to collect the tax. Most German DTAs contain such a regulation.

3.1.2 Conflict with Global Minimum Tax

The wording of Article 7(1) OECD-MA significantly conflicts with the global minimum tax. It would result in the foreign subsidiary’s profits being taxed at the parent company. This profit is not attributable to the domestic parent company according to the general principles. Rather, it is realized by the foreign subsidiary. It may be that the domestic parent company has actually made no profit. However, as a result of the allocation of profits of the foreign subsidiary, it would then be allocated a profit which it would have to pay tax. It is therefore no longer the State of residence of the subsidiary that has the right to tax, but the parent company. This applies regardless of whether the subsidiary has a permanent establishment in Germany.

3.1.3. Application of Article 1(3) OECD-MA

The solution to this conflict could lie in the provision of Article 1(3) OECD-MA. It stipulates that the double taxation agreement is not intended to restrict the possibility for a state to tax residents.

10.4.2 of the “Report on Pillar Two Blueprint” compares the global minimum price with the additional taxation. Therefore, both the additional taxation and the global minimum taxation should be the taxation of the residents of a State by the State of residence itself. This taxation is expressly provided for in Article 1(3) OECD-MA.

It is necessary, however, that it is actually a taxation of the resident of the State. For this purpose, the profits must actually be attributable to the resident. However, these are profits of the foreign subsidiary. The global minimum tax also applies if profits have not been misused abroad. As a result, an original profit of the foreign subsidiary, which is not relocated from the domestic market, is burdened in the domestic market.

3.1.4. Double Taxation Agreement without Article 1(3) OECD-MA

There are also double taxation treaties which do not contain a regime equivalent to Article 1(3) OECD-MA. The OECD Model Commentary on Article 7 OECD-MA states that states are not prevented from taxing residents in respect of profits arising from a participation in a foreign company. In fact, this could be interpreted as if the parent company’s State of residence could tax the foreign subsidiary’s profits with a global minimum tax.

However, this broad understanding would ultimately lead to Article 7(1) OECD-MA being completely called into question. The State of residence of the parent company would have full freedom to tax the profits of foreign subsidiaries with reference to participation. Therefore, the OECD Model Commentary also states that the reason for the exception is that the tax levied by one State on residents in this way does not reduce the profits of the other State company.

The fact that the tax levied does not reduce the profits of the foreign company can be justified with regard to additional taxation. This only takes into account profits misused to low-taxation countries. Profits earned abroad and low-taxed there should not be distributed to the parent company. In order to counteract this, the additional taxation fabricates a corresponding distribution of foreign profits to the parent company (§ 10 (2) sentence 1 AStG).

However, the global minimum tax applies in principle independently of the fulfilment of the offences identified as abusive. As a result, an original profit of the foreign subsidiary, which is not relocated from the domestic market, is burdened in the domestic market. This is also shown by the fact that the low-taxing state is given the opportunity to charge the under-taxed profit itself by means of a qualifying domestic minimum top-up tax. It is therefore a real taxation of the profits of the subsidiary. Therefore, there is an inconsistency with Article 7(1) OECD-MA.

3.2. Breach of Article 10 OECD-MA

Article 10 OECD-MA regulates the taxation of dividend payments. The country of residence of the parent company is therefore entitled to taxation only if the dividend is distributed. However, when the domestic parent company is charged with global minimum tax, the parent company does not actually receive a dividend. Unlike in the case of additional taxation, no early distribution is fictitious. In the case of additional taxation, a subsequent actual dividend payment according to § 11 AStG is deducted in the income determination of the dividend recipient to the extent that the dividend has already been subject to income tax or corporation tax as an additional amount. Such a regulation is lacking in the case of the minimum tax.

Treaty Override as a Rescue of the Global Minimum Tax?

4.1 Treaty Override provided

Legislators have also recognized these problems. § 100 MinStG provides for a so-called Treaty Override. The standard provides for the application of the minimum tax, notwithstanding an agreement to avoid double taxation. According to the Federal Constitutional Court, this is possible. Accordingly, international agreements do not constitute general rules of international law. They therefore do not participate in the priority over the simple law provided for in Article 25 sentence 2 GG. International agreements, such as DBA, therefore have the rank of simple laws. Therefore, according to the principle “lex posterior derogat legi priori” they can be displaced by later laws.

4.2 Do Treaty Overrides also apply to future DTAs?

Over time, the question of the temporal effect of such a treaty override arises. A Treaty Override could also overlay future DBAs. The former legislator opts for a Treaty Override. The later legislature enacts an approval law for a DTA in contradiction thereto.

In another case, the Bundesfinanzhof (BFH) has already applied an earlier Treaty Override over a later DTA. However, BFH has not comprehensively appreciated this problem. It therefore remains to be seen what temporal effect a DBA has.

Another consideration would be that in legal competition, the more specific law takes precedence over the more general one. Then the global minimum tax would have to be a more specific law. This could arise with regard to the companies covered by the minimum tax – the personal scope. However, DBAs are more special in that they only cover certain country constellations geographically.

5th summary

In summary, it can be stated that the global minimum tax violates DBA. However, this violation is legalized by the regulation in § 100 MinStG. However, it remains to be averted whether the Treaty override also applies with regard to future DTAs.