Agreements under international law between two countries

Tax treaties are agreements under international law between
two countries. The purpose of such agreements is to avoid
double taxation. Tax treaties are generally based on one of two
systems: either (i) the country of the taxpayer’s residence does
not levy taxes on income having its source in the other treaty
country (exemption system), or (ii) the country of residence tax-
es such income, but credits the taxes paid in the source country
against its own income tax liability (credit system). Under credit
systems, per country limitations normally apply. Germany may
also credit notional foreign withholding taxes if so provided for
in the relevant tax treaties. Provisions of this nature are included
in a few tax treaties with industrially less developed countries,
normally as an incentive for German companies to invest in
those countries.

The treaty relief described above generally applies to resident
individuals as well as to corporations. If income is exempt from
tax under a treaty, Germany retains the right to take account of
this income for purposes of determining the applicable average
tax rate on other taxable income in Germany (progression clause,
Progressionsvorbehalt).

In addition to the treatment under tax
treaties outlined above, the following principles generally apply
to income from employment and self-employment:

– Remuneration paid to a resident of Germany for employment
exercised in the other treaty country is normally taxed in that
other country, unless (i) the recipient is present in the other
country for not more than 183 days during the year, (ii) the
salary is paid by an employer who is not a resident of the
other country, and (iii) the salary is not borne by a permanent
establishment of the employer in the other country. The tax
treaties between Germany and a number of neighboring
countries contain specifc regulations for cross-border com-
muters. Under these regulations, the country of residence
retains the right to tax the employment income of the
cross-border commuter under certain circumstances, even if
the 183-day threshold is exceeded.

– Income from self-employment is usually taxable in the
country of residence unless the individual has a fxed base
regularly available to him in the other country for the purpose
of performing his activities. Some treaties, however, apply
the provisions for income from employment rather than the
“fixed base” criterion.