Subject­ to ­tax clause

Germany’s avoidance of double taxation by the exemption meth-
od under the terms of its tax treaties can, in some cases, cause
the income in question to escape taxation altogether (so-called
white income). This is the case if the other treaty country fails
to tax the income that Germany has exempted, for instance be-
cause the two countries classify the income differently for treaty
purposes (qualifcation confict) or have different interpretations
of a particular treaty provision.

Under the subject-to-tax clause, Germany does not avoid double
taxation by the exemption method under its tax treaties to the
extent the other treaty state

– classifes the income under a different treaty provision, caus-
ing it to be exempt in, or to be taxed at a reduced rate by, the
other treaty state, or

– fails to tax the income because it is derived by a person that
is not subject to tax in the other state by reason of the per-
son’s domicile, residence, place of management, registered
office, or other similar criterion.

The subject-to-tax clause, does not apply to dividends that are
excluded from the German tax base under a tax treaty. But the
subject-to-tax clause does apply if the dividends in question
reduce the income of the distributing corporation.