The agreement procedure with regard to the EU Arbitration Convention is exclusively concerned with the elimination of double taxation, which is related to transfer prices. In addition, only cases in which the affiliated companies are located in EU member states are relevant. Operating sites are placed on an equal footing with associated companies. The settlement procedure initiated on the basis of the EU Arbitration Convention on the basis of a reasoned request allows the financial authorities involved to process individual cases within two years. Exceeding this period leads to arbitration proceedings that should result in an opinion with a proposed solution within six months. Applicants may also express their views. After receiving the opinion, the financial authorities decide on a solution. If no solution is reached within this period, the solution of the arbitration shall apply. However, implementation ultimately depends on the consent of the applicants.
The European Union only provides its member states with requirements for a uniform regulation in the field of taxes in certain aspects. In most cases, the nation states design their own tax laws without discussing them with other contracting states. However, when it comes to avoiding double taxation, which occurs in at least two Member States on the same tax situation, the EU provides for two means of settling such disputes. One of the two means is the agreement procedure based on the EU arbitration convention.
The agreement procedure within the framework of the provisions of the EU Arbitration Convention is based on EU law, which is regulated in the Convention itself. In addition to the international level, however, national requirements must also be observed. For the Federal Ministry of Finance has published a leaflet in the rank of a BMF letter on this topic, which deals with understanding procedures for the elimination of double taxation.
The agreement procedure based on the EU Arbitration Convention is intended only for a specific purpose. This is about eliminating double taxation, which results from different countries applying different transfer prices when taxing company profits. For other tax situations in which double taxation occurs, either the mutual understanding procedures according to the respective double taxation agreement or according to the EU Double Taxation Agreement Dispute Settlement Act (EU-DBA-SBG) are available.
The agreement procedure under the EU Arbitration Convention provides for both cases in which two different affiliated companies are affected by double taxation and cases in which the derogation only concerns permanent establishments in different EU countries. The premises are treated as independent companies. However, what cannot be the subject of an agreement procedure based on the EU arbitration convention is the clarification of a question about the tax status of a permanent establishment. Such issues shall be clarified in other mutual understanding procedures.
Furthermore, an agreement procedure based on the EU Arbitration Convention can be initiated both in the case of double taxation that has already taken place, and if it only threatens. In the latter case, however, the conditions for an agreement procedure under the EU Arbitration Convention are only met if the tax administrations of the countries involved in taxation lead to different positions. However, if the dispute takes place between a taxpayer and at least one tax authority, it is not a matter on which the EU arbitration convention can serve as a basis for reaching an agreement.
First of all, a taxpayer must determine whether he actually fears or has already experienced a certain double taxation in the context of the choice of transfer prices through taxation in several EU countries. If you can justify this well, then you can make a request to initiate an agreement procedure on the basis of the EU arbitration convention. The application is addressed to the financial administration in whose state the complainant company is established. If the German tax administration is affected, the Federal Central Tax Office (BZSt) is the recipient of the application. There is a period of three years
Upon receipt of the application, the financial authority informs its partner authority abroad. For their part, both examine whether the formal and substantive conditions justify acceptance of the application. In addition, there will be an examination of all possibilities that can bring about a solution based on national law. If the conditions for the application are met, but no other solution outside the mutual agreement procedure is considered, the tax authorities will meet and discuss their respective ideas on how to avoid double taxation. However, taxpayers are by no means directly involved in the negotiations themselves.
If the financial authorities cannot reach an agreement within two years of the application, the EU arbitration convention provides a different way. For this purpose, an advisory committee is set up to deal with the dissolution of double taxation. The financial authorities shall be obliged to obtain the opinion of the Advisory Committee.
Furthermore, the advisory committee consists of two representatives of the financial authorities involved. They can also agree on only one representative each. In addition, the authorities involved draw up a list of ten people (five proposals from each) whom they consider independent and whose competence in the field of tax law they rely on. In addition, the persons must be citizens of the respective country and resident in the EU area. From this list, an even number of representatives are then chosen, either by agreement or by lot.
This advisory committee now has six months to prepare an opinion. To this end, the Advisory Committee may request both documents and information from the financial authorities involved and from the related undertakings concerned. In the framework of the agreement procedure, however, the EU arbitration convention also provides for the right of affiliated companies to explain their situation to the body itself. This can also be done by a representative, who in most cases should probably be a tax consultant.
The basis for the opinion is the decision taken by a simple majority of the members of the Advisory Committee to resolve the tax dispute. In this case, the solution must comply solely with the arm's length principle. Other principles, such as those provided for in German tax law for the determination of international transfer prices, are thus left out.
If an agreement is reached, the implementation ultimately depends on the written consent of the applicants. In addition, the applicant must discontinue all legal remedies already initiated and waive further remedies. He shall have a reasonable period of time to take that decision. In Germany it is at least 60 days. However, if the applicant rejects the decision or if the time limit expires, the agreement procedure shall be deemed to have failed. Then it remains with the previous double taxation on the basis of the already issued decisions.
If an arbitration procedure under the provisions of the EU Arbitration Convention has taken place within the framework of the agreement procedure, special conditions apply for the agreement. The authorities involved in the mutual agreement procedure may consider the solution proposed in the opinion when reaching agreement or find another mutually agreed solution. However, if the tax authorities reject the advisory committee’s proposals and do not reach any other alternative agreement within six months of the receipt of the opinion, the authorities shall be obliged to refer to the measures proposed in the opinion when releasing double taxation.
No matter how an agreement is reached, the agreement procedure based on the EU Arbitration Convention takes a maximum of three years. Moreover, it always leads to a solution that can lead to the elimination of double taxation in connection with the allocation of profits of affiliated companies in the EU jurisdiction.
Just as with other mutual understanding procedures, the financial authorities involved bear the costs incurred by this procedure. This also applies to the costs associated with the establishment of the Advisory Committee and the arbitration.
But also the applicants may incur costs. For example, these costs may be justified by hiring a tax consultant to represent the Advisory Committee in the arbitration. In any event, applicants shall always bear their own costs. It depends on the applicable tax laws in the country of residence whether these costs are deductible as operating expenses. At least this is the case in Germany. Therefore, in this country an indirect reimbursement of the costs takes place via a reduction of the taxable profit.
Due to the fact that the agreement procedure is subject to a primary term of two years and thereafter discusses an arbitration procedure on the avoidance of double taxation within six months, such proceedings with a maximum duration of three years usually take much shorter than agreements which generally refer to a DTA. In addition, the agreement procedure based on the EU Arbitration Convention guarantees that an agreement will be reached on the dissolution of double taxation. This is a great relief compared to other international understanding procedures. However, only companies based in the EU can benefit from this advantage. In addition, this only applies to matters related to the establishment of reasonable transfer prices.
Furthermore, in an agreement procedure based on the EU Arbitration Convention, companies affected by double taxation can participate directly in the development of a solution. However, this only applies if an advisory committee takes over the matter. Nevertheless, this is a striking difference from the very limited options available to a taxpayer in the context of a DTA settlement procedure. It is not a guarantee of success, but it is a great help to have a tax consultant who is competent in the field of international tax law and who can convince the Advisory Committee to support the most favourable solution for the taxation of company profits.
This article does not replace tax or legal advice in an individual case. Facts, current law, jurisdiction, documentation and implementation remain decisive.