Germany has concluded so-called double taxation agreements (DTAs) with other countries. However, they regularly have tax gaps or know Germany’s tax law. Therefore, there is so-called Treaty Override. This is a national standard which abolishes the rules of a double taxation agreement. This raises the question of whether this is permissible and how a Treaty Override works. We explain all this in this post

Translated, Treaty Override can be understood as “overriding an agreement”. Such a scheme can therefore, as a state measure, limit or nullify the effect of a DTA. The term only covers legislative acts. Thus, a Treaty Override presupposes a conflict of norms between national law and DBA. Conflicts that arise in the interpretation of the rules in the DTA in the national courts are therefore not to be classified as Treaty Override. Rather, such conflicts are to be resolved by the agreement procedure according to Art. 25 OECD-MA. Since the introduction of the Dispute Settlement Directive, the procedure has been significantly simplified and accelerated. Only a direct intervention in a DBA constitutes a Treaty Override. Consequently, there is a Treaty Override if the legislature, after concluding a DTA, in full consciousness exercises direct influence on the agreement reached in the DTA and suspends it by enacting a national law contrary to the DTA.

There are various reasons why national legislators enact such Treaty Override. On the one hand, they should intervene at the point at which regulations in the DTA can be used for tax optimization without the design also pursuing an economic function. In addition, the double non-taxation under the DTA should be avoided if both the source state and the state of residence consciously or unconsciously do not tax. For such double non-taxed income, the term “white income” is used.

Treaty Override can work in different ways. For example, the agreement may provide for the exemption method, but the residency state may provide for the credit method in the Treaty Override. But there are also norms that apply the DTA as Treaty Override only if the source state has demonstrably made use of its taxation right. Furthermore, a Treaty Override can also completely modify the decision made in the DTA or link another legal consequence to it.

Art. 27 WÜRV requires the principle pacta sunt servanda, in English: contracts are to be retained. If a State Party unilaterally dissolves an international treaty by issuing a national law incompatible with the law, that State shall infringe that principle.

According to Article 60 I of the WPRK, the other faithful State may terminate the Treaty if there is a significant breach of the Treaty. Article 60 III of the WPRK defines this material breach of contract as a breach of a provision essential for the achievement of the purpose or objective of the contract. Treaty override can lead to double taxation. This undermines the entire purpose of the DTA, which is also to avoid double taxation. Therefore, the Treaty Override constitutes a significant violation of this nature. There are other comprehensive ways of combating this breach of the Treaty. In practice, however, these possibilities are hardly used. As a national, you have no right to invoke these possibilities, since international agreements apply only inter partes between the contracting states.

The question of admissibility under German law depends on whether simple law can change the effect of the DTA. Art. 25 GG regulates the status of the general rules of international law in the German hierarchy of norms. DTAs, on the other hand, are international treaties and not general rules of international law. Therefore, Article 25 of the GG cannot constitute an unconstitutional nature of a treaty override, since it does not deviate from general rules of international law.

Especially for DTA, however, the regulation of Art. 59 II 1 GG applies. This standard provides that the legislature can only approve or reject an international treaty. It is argued that this rule cannot be deviated from, in which the contract is approved in its entirety, but changes are subsequently made by individual laws that contradict the consent law. Nevertheless, Art 59 II GG should not restrict the legislature to the extent that later detailed regulations of the DTA are no longer permitted. The Consent Act is just a simple federal law. If the legislature later adopts another simple law, then, since both laws are on the same level, only the lex posterior and lex specialis regulation applies. This is therefore only a conflict at the legal level and not at the constitutional level. Under these considerations, a constitutional violation is out of the question.

§ 2 AO gives the appearance of the priority of the DTA over national law. Nevertheless, a simple law such as § 2 AO cannot give precedence over simple law. As a result, the legislature may later make an exception to § 2 AO and declare the temporarily following law as treaty override priority. A note in the manner “regardless of the agreement” is sufficient.

An example of a Treaty Override is § 50d paragraph 8 EStG. Accordingly, the foreign income from non-self-employed work of an unrestricted taxpayer will only be exempt from taxation in Germany if the taxpayer can prove that the state to which the right of taxation is granted under the agreement is actually taxed. Cases in which there is no tax can occur, for example, when hiring on a cruise ship, if it docks only on a few days in a port. Generally, if your income is not taxed under the DBA, you should always check whether a Treaty Override is relevant. Such regulations exist not only in the income tax law but also, for example, in the foreign tax law.