In order for the Federal Republic of Germany to be able to assert its right to tax domestic or foreign assets, certain conditions must be met. Such prerequisites are tax connecting points in Germany. Which tax connection points there are for domestic and foreign business assets, read here in this article. In order to avoid double taxation, in addition to the DTA, there are also purely national regulations for the crediting or exemption of (foreign) tax amounts, which are also explained here.

If a person is subject to unlimited taxation in Germany on the basis of his residence, habitual residence, place of management or seat, all his income is subject to German taxation (§ 1 para.). 1 EStG, § 1 para 1 no. 1 KStG. If the person is also subject to unlimited taxation in another country due to his residence, permanent residence, place of management or other similar characteristic (double resident), the Tie Breaker Rule[195] of the art. 4, par. 2 or para 3 OECD-MA, according to the criteria specified therein, grants residence under agreement law to only one country. However, this does not exclude or restrict the German taxation law, since also in cases of dual residence the German taxation law for the domestic business assets according to art. 7 par. 2 and Art. 13 para 2 OECD-MA remains.

1.2. Limited tax liability

If a natural person has neither a domicile nor his habitual residence in Germany, he is subject to § 1 para. 4 EStG exclusively with its domestic income in accordance with § 49 EStG of German taxation. The same applies according to § 2 no. 1 KStG to legal persons who have neither their registered office nor their management in Germany. Since the Federal Republic of Germany does not distinguish between current profits and capital gains for domestic assets, the taxation law in both cases results from § 49 para. 1 No. 2 lit. a EStG. This right of taxation is not provided by Art. 7 par. 2 or Art. 13 para 2 OECD-MA restricted or excluded.

If a foreign state imposes a tax on domestic income, for example because the business owner is subject to unlimited tax liability in that state, this does not restrict the domestic tax law. According to § 34c EStG, a crediting or deduction of the foreign tax only takes place if the foreign tax on foreign income is levied in accordance with § 34d EStG[196], which is however excluded here.

1.3. Result

As a result, the Federal Republic of Germany has an unrestricted right to tax assets of a domestic permanent establishment – regardless of the extent of the person’s tax liability.

For assets of a foreign permanent establishment, the scope of German taxation law depends on the tax law of the foreign state as well as on the conclusion and content of a DTA:

2.1 Unrestricted tax liability

The basic prerequisite for the taxation of foreign permanent establishment profits in Germany is that the permanent establishment belongs to a natural or legal person who is taxable without restriction in Germany. This is due to the fact that foreign permanent establishments of not unlimited taxable persons lack a tax connection point in the country. In other words, a German (limited) right to tax foreign assets can only arise if it is the permanent establishment of a company based in the Federal Republic of Germany.

If the assets are currently located in a foreign establishment of the taxpayer without restriction in Germany, the Federal Republic of Germany will avoid double taxation by offsetting the foreign tax according to § 34c EStG (in the case of domestic corporations § 26 KStG). The same applies if a DTA is concluded with the foreign state, but this avoids double taxation by offsetting the foreign tax. Due to the crediting of foreign tax, the collection of German income tax or corporate income tax is only possible insofar as German tax exceeds foreign tax.[197] This leads to a limited taxation right of the Federal Republic of Germany. Instead of the crediting of the foreign tax according to § 34c Abs. 1 EStG, the taxable person can in accordance with § 34c para. 2 EStG on request to deduct the foreign tax when determining the foreign income. Since this leads to a reduction in the tax base of the domestic tax, in my opinion there is also a restriction of the domestic tax law in the case of the deduction of the foreign tax.[198] If the foreign state does not levy tax - for example because it does not levy tax under national law or because it applies the DTA in such a way that the income in its state is to be exempted from taxation - the German tax level will not be reduced and therefore the German tax law will not be restricted.[199]

2.2 Exemption method and DBA credit method

If the transferred assets are located in a permanent establishment of a DTA State, the taxation right for the permanent establishment income is regularly assigned to the permanent establishment State (Art. 7 (2) and 13 (2) OECD-MA). Although the OECD-MA offers the negotiating States Parties to agree both the exemption method (Art. 23a OECD-MA) and the credit method (Art. 23b OECD-MA). However, both Contracting States will have determined the method of exemption, so that the State of residence will have to exempt foreign income from its domestic taxation. In such DTA cases, the Federal Republic of Germany is in principle not entitled to any taxation right for the foreign company income. However, in certain cases, the legislature disregards the tax exemption under treaty override.[200] Classic regulations are present, for example, in § 50d para. 1, 3, 8, 9, 10 and 11 EStG, § 50i EStG and § 20 para. 2 AStG. In cases of Treaty Override, unrestricted taxation (e.g. § 50 Abs.) may apply despite DBA. 1, 3, 8, 9, 10 and 11 as well as § 50i EStG) or a limited taxation right (e.g. § 20 para 2 AStG).