Anyone who emigrates from Germany, works abroad on a permanent basis, or commutes between two countries sooner or later runs into the same basic question: can the very same income be taxed twice – once in the new state of residence and once in Germany? Double taxation agreements (DTAs) were created precisely for this situation. This article lays the groundwork on which other, more specific articles in this series build – for example on inheritance tax on foreign assets or on habitual abode in tax law: why DTAs exist at all, how they follow the OECD Model Convention, what role central distributive rules such as Art. 15 (income from employment) and Art. 21 (other income) play, how residence conflicts are resolved through the so-called tie-breaker rule, how DTAs relate to German foreign tax law, and what applies when no agreement exists with the destination country at all.
Why Double Taxation Agreements Exist: The Underlying Problem
Double taxation arises whenever two states tax the same taxpayer on the same income under their respective national law. This is not an exceptional case but the logical consequence of differing nexus principles: the state of residence – in Germany established by a domicile (Wohnsitz, § 8 AO – Abgabenordnung, the German Fiscal Code) or a habitual abode (gewöhnlicher Aufenthalt, § 9 AO) – taxes, under the worldwide income principle, in principle the entire income a person earns anywhere in the world. The source state, by contrast, levies tax on income earned within its own territory, regardless of where the person is resident. Someone who remains resident in Germany but works abroad or earns investment income there can therefore find themselves in a situation where both states simultaneously claim a right to tax.
To avoid this so-called juridical double taxation, states conclude bilateral double taxation agreements. They are treaties under public international law that – put simply – determine which of the two contracting states holds the right to tax a particular type of income, in whole or in part, and how any remaining double taxation is to be eliminated methodically. In Germany, DTAs are transformed into directly applicable domestic law by an act of assent (Zustimmungsgesetz) pursuant to Art. 59 Abs. 2 Satz 1 Grundgesetz (the German Basic Law). § 2 Abs. 1 AO expressly provides that such treaties take precedence over ordinary tax statutes – the so-called primacy of international treaty law. In the event of a conflict, a DTA therefore initially displaces domestic tax law, though without replacing it entirely: it merely sets limits on which state may tax, while the amount and manner of taxation continue to be governed by the respective national law.
Structure of a Double Taxation Agreement: The OECD Model Convention as a Template
Germany has a double taxation agreement covering taxes on income and on capital with well over 90 states; the Federal Ministry of Finance (Bundesministerium der Finanzen) publishes an updated overview of the status of, and ongoing negotiations on, these agreements every year. Each agreement is individually negotiated on a bilateral basis and can therefore differ in detail. In terms of structure, however, the great majority follow the OECD Model Convention for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital (OECD-Musterabkommen, commonly abbreviated OECD-MA), which serves as a template for negotiations and is supplemented by an extensive Commentary for purposes of interpretation.
The typical structure of a DTA modelled on this template is divided into four blocks:
- Scope (Art. 1–2 OECD-MA): Which persons and which types of tax fall under the agreement.
- Definitions (Art. 3–5 OECD-MA): General definitions as well as the central concepts of residence (Art. 4) and permanent establishment (Art. 5).
- Distributive rules (Art. 6–22 OECD-MA): A separate rule for each type of income, allocating the right to tax wholly, partly, or subject to certain conditions to the state of residence or the source state – for example for income from immovable property, business profits, dividends, interest, royalties, capital gains, income from employment (Art. 15), pensions, the catch-all provision for other income (Art. 21), and the taxation of capital (Art. 22).
- Methods and special provisions (Art. 23–29 OECD-MA): How any remaining double taxation is eliminated methodically – under Art. 23A OECD-MA by exempting the foreign income in the state of residence (generally subject to a progression proviso, Progressionsvorbehalt) or under Art. 23B OECD-MA by crediting the tax paid in the source state against the domestic tax. In addition, there are provisions on non-discrimination, the mutual agreement procedure, and the exchange of information between tax authorities.
Key Distributive Rules: Art. 15 and Art. 21 OECD-MA
Two distributive rules are of particular practical relevance for emigrants.
Art. 15 OECD-MA – Income from Employment follows, as a rule, the principle of the place of work: under Art. 15 Abs. 1, salaries, wages, and similar remuneration can in principle be taxed only in the employee’s state of residence – unless the work is actually carried out in the other contracting state, in which case the right to tax (or a share of it) generally also passes to that state where the work is performed. Art. 15 Abs. 2 provides a practically significant exception to this principle, the so-called 183-day rule. It applies only if all three of the following conditions are met cumulatively:
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| Condition | Content |
|---|---|
| Length of stay | The employee is present in the state where the work is carried out for no more than 183 days in total within any twelve-month period as defined in the relevant agreement |
| Employer | The remuneration is paid by an employer who is not resident in the state where the work is carried out |
| Cost-bearing | The remuneration is not borne by a permanent establishment that the employer maintains in the state where the work is carried out |
If all three conditions are met, the right to tax remains exclusively with the state of residence, even though the work was carried out in the other state. If even one condition is not met, the state where the work is performed generally acquires the right to tax (or a share of it).
Art. 21 OECD-MA – Other Income is the catch-all provision of the agreement: income of a person resident in a contracting state that is not expressly dealt with under any of the preceding distributive rules can, in principle and irrespective of its origin, be taxed only in the state of residence. Art. 21 Abs. 2 contains an important limitation, the so-called permanent-establishment proviso (Betriebsstättenvorbehalt): if the rights or assets from which the income derives are actually connected with a permanent establishment that the recipient maintains in the other contracting state, the allocation to the state of residence does not apply.
Residence Conflicts and the Tie-Breaker Rule under Art. 4 Abs. 2 OECD-MA
Every distributive rule presupposes that it has first been established in which of the two contracting states a person is “resident” within the meaning of the agreement at all. Art. 4 Abs. 1 OECD-MA initially defines residence by reference to the respective domestic law of the contracting states. This creates a structural problem: if – as frequently happens on emigration – both the former and the new state of stay treat the person as resident under their own domestic law, for example because a domicile under § 8 AO continues to exist in Germany despite the move abroad while a new habitual abode has at the same time been established in the destination state, dual residence results. Without resolving this conflict, the agreement could not achieve its purpose.
For this case, Art. 4 Abs. 2 OECD-MA contains the so-called tie-breaker rule – a graduated sequence of tests, applicable exclusively to individuals, that forces a clear allocation to only one state:
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| Tier | Criterion | Content |
|---|---|---|
| 1 | Permanent home | The state of residence is the state in which a permanent home is available. If a permanent home is available in both states, the next tier is decisive |
| 2 | Centre of vital interests | Decisive is the state with which the closer personal and economic relations exist – for example family ties, circle of friends, club memberships, or the focus of professional activity |
| 3 | Habitual abode | If the centre of vital interests cannot be determined, or if no permanent home is available in either state, the state in which the person habitually stays is decisive |
| 4 | Nationality | If the person has a habitual abode in both states or in neither, nationality is decisive |
| 5 | Mutual agreement procedure | If the person holds the nationality of both states or of neither, the competent authorities of the contracting states settle the question of residence by mutual agreement |
This test is carried out strictly step by step: only once one tier fails to produce a clear result is the next tier examined. In practice, the great majority of cases are already resolved at the first two tiers – which is why actually relinquishing a permanent home in the former state of residence, and a traceable shift of the centre of vital interests on emigration, carry such considerable practical weight.
Relationship to German Foreign Tax Law (Außensteuerrecht)
The primacy of DTAs under § 2 Abs. 1 AO is not unlimited. Because treaties under international law rank, in Germany, as ordinary federal statutes, the legislature can displace them by way of a later statute that expressly deviates from them – a so-called treaty override. The Bundesverfassungsgericht (Federal Constitutional Court) expressly held this to be constitutional in its decision of 15 December 2015 (2 BvL 1/12), in proceedings concerning the relationship between § 50d Abs. 8 Satz 1 EStG and the DTA with Turkey: the principle of democracy allows a later legislature to revise earlier legal acts – including treaties under international law – within the limits of the Grundgesetz.
Three provisions of the Außensteuergesetz (AStG, the Foreign Tax Act) are of particular practical significance for emigrants:
- § 20 Abs. 2 AStG contains a so-called switch-over clause (Umschaltklausel) and is regarded as a classic example of a treaty override: for certain low-taxed, passive income of foreign permanent establishments, the credit method is applied instead of the exemption method that the agreement itself would otherwise provide for.
- § 2 AStG imposes an extended limited tax liability (erweiterte beschränkte Steuerpflicht) for ten years after emigration on individuals who were subject to unlimited tax liability in Germany for at least five of the last ten years before emigrating, who move to a low-tax country, and who continue to maintain substantial economic interests in Germany there. This provision is not itself a treaty override; its legal consequences can, however, be limited by an existing DTA if that agreement allocates an exclusive right to tax to the destination state – in that case, the income concerned generally remains exempt in Germany, though subject to a progression proviso.
- § 6 AStG governs the exit taxation (Wegzugsbesteuerung) of substantial shareholdings within the meaning of § 17 EStG: on emigration, an increase in value that was previously unrealised under German law is taxed, because Germany would otherwise fear losing its right to tax this increase in value entirely to the destination state as a result of the change of residence brought about by the DTA. This provision operates independently of the DTA distributive rule for capital gains and can become relevant, in addition to income tax questions, on emigration.
What Applies If There Is No Double Taxation Agreement?
With some states – in particular those with little economic exchange with Germany or with their own tax systems that deviate substantially from the OECD model – Germany does not maintain a double taxation agreement. In this case, there is no treaty-based allocation of the right to tax at all: both states apply exclusively their own national law, with no obligation under international law to forgo any part of the taxation. Genuine double taxation is considerably more likely in these cases than with DTA states.
For such cases, German law provides a unilateral substitute mechanism under § 34c EStG, which is structurally equivalent to § 21 ErbStG for inheritance tax, discussed in another article in this series: if a person subject to unlimited tax liability is charged, in the source state, a tax corresponding to German income tax on foreign income, that foreign tax, once assessed and paid, is credited against German income tax under § 34c Abs. 1 EStG. Under § 34c Abs. 6 Satz 1 EStG, this credit applies – subject to a few special cases – precisely where no double taxation agreement exists with the state concerned. Alternatively, on application, the foreign tax can be deducted in determining income instead of being credited.
This mechanism, too, has clear limits: the credit is always capped at a maximum credit amount (Anrechnungshöchstbetrag), which is determined by the proportion attributable to the foreign income, calculated using the average German tax rate. If the foreign tax burden is higher than this proportional German amount, the difference generally remains as an economic double burden. In addition, the foreign tax must “correspond” to German income tax, and the credit is granted only on application and against proof of the foreign tax assessment.
Hypothetical example for illustration (entirely fictional, not an actual client situation): A person relocates permanently to a country with which Germany does not maintain a double taxation agreement and works there on a self-employed basis, among other things continuing to work for German clients. Because both a home and the centre of vital interests are located in the destination state, the person is subject there, under its law, to local income tax on their entire income; at the same time, the tax authorities of that state also levy tax on the fees derived from Germany. Since no DTA exists, there is no distributive rule to resolve this conflict. If the person also remains subject to unlimited tax liability in Germany – for instance because a German domicile has not been fully given up – they can have the tax paid in the destination state, to the extent it corresponds to German income tax, credited only within the maximum credit amount under § 34c EStG. If this maximum amount is not sufficient to fully cover the foreign tax actually paid, an economic double taxation remains that cannot be corrected further as a matter of law in the absence of an agreement.
When Is Legal Advice Worthwhile?
Whether a double taxation agreement applies at all in a given case, which distributive rule is relevant to the specific income, how a residence conflict is actually to be resolved under the tie-breaker rule, and whether German foreign tax law such as § 2, § 6, or § 20 Abs. 2 AStG additionally applies cannot be assessed schematically, but only on the basis of the specific personal and financial circumstances. Anyone planning to emigrate, working abroad, or commuting between several countries should have these questions clarified at an early stage – ideally before the move abroad has been completed, and not only once both tax authorities have already issued assessments.
The Fiala law firm has published extensively on international tax law and assists clients in correctly assessing their personal residence and tax situation on emigration, and in identifying potential double taxation risks at an early stage.
Are you planning to move abroad and are unsure whether and how a double taxation agreement protects your income? Contact the Fiala law firm to have your individual situation assessed from a legal perspective, before deadlines expire or foreign tax assessments become final and binding.
