Is it unconstitutional for German domestic tax legislation to effectively alter the terms of its double taxation agreements ("DTA") with other countries?
The German Federal Fiscal Court (the "Fiscal Court") believes that tax legislation is unconstitutional if it amends DTAs and it has referred this question to the German Federal Constitutional Court (the "Constitutional Court") for its ruling on this point. If the Constitutional Court agrees with the Fiscal Court this could have the effect of overturning a number of provisions (so-called "treaty overrides") contained in Germany's tax laws which alter DTAs to the taxpayer's detriment.
An employee of a German company, who had worked for the company in Turkey, was taxed in Germany on his employment income earned in respect of his Turkish duties. The employee brought a legal action. He claimed that his wage from this work was tax-exempt in Germany as, according to the German/Turkish DTA, Turkey had the right to tax this income. The tax authority referred to domestic tax legislation (§ 50d par. 8 of the German Income Tax Act) which required that the taxpayer prove that he had paid the corresponding income tax in Turkey. As the taxpayer was unable to prove that this tax had been paid this income was taxed in Germany. However, according to the relevant German/Turkish DTA, this wage should have been tax exempt in Germany, even where it had not been declared or taxed in Turkey.
The Fiscal Court’s interpretation
The Fiscal Court is of the opinion that the treaty override adopted in this case is unconstitutional for two reasons. The first is that, without an acceptable legal justification, the domestic legislation was contrary to Germany’s obligations under international law. The second is that the law discriminated against taxpayers with employment income compared to taxpayers with non-employment income.
While the question referred to the Constitutional Court concerns only the stipulation of section 50d par. 8 of the German Income Tax Act, many other regulations will have to be reviewed by the Constitutional Court. This is because the German legislator has recently been making extensive use of treaty overrides in order to prevent people avoiding taxation.
In order to avoid recourse to treaty overrides, Germany has increasingly been seeking to include in DTAs provisions regarding the home country’s right to tax income in situations such as the one discussed above.
Press release no. 30/2012 of 9 May 2012 by the German Federal Fiscal Court
For further information or to discuss any of the issues raised, please contact Joachim Menz on +49 89 242 2300.