The German Implementation Act on the settlement of tax disputes arising from agreements to avoid double taxation and to prevent tax reductions in the field of taxes on income and capital between member states of the European Union, in the draft version of 16 April 2019, is to apply to all complaints about double taxation of income or capital reported after 1 July 2019, provided that these complaints relate to cases in tax years beginning after 1 January 2018. The German legislator is thus following the implementation deadline of the EU Dispute Settlement Directive, which must be implemented by 30 June 2019.
It provides for an independent procedural framework and is therefore not intended to replace, but rather to supplement, the existing EU Arbitration Convention, which applies to transfer pricing and permanent establishment profit allocation cases. However, the German Federal Ministry of Finance assumes that - although optional - the Implementation Act will de facto replace the existing procedures under participation of EU countries in practice.
The present Draft Law on the resolution of double taxation cases takes over all taxes and case constellations for taxes on income and capital which the EU member states consider relevant on the basis of the EU Arbitration Convention, the respective Double Taxation Treaties and possible future agreements. This can be seen as a significant improvement over the EU Arbitration Convention. This only applies to double taxation cases based on differences in transfer pricing.
In principle, the dispute settlement procedure takes precedence over the procedure under the Double Taxation Treaties or the EU Arbitration Convention. This means that as soon as the taxpayer requests a dispute settlement procedure, comparable procedures under the Double Taxation Treaty or the EU Arbitration Convention must be terminated.
Unlike the Arbitration Convention, the procedures under the EU Directive are open not only to companies but also to private individuals.
In terms of procedure, the Draft Law closely follows the EU Arbitration Convention and provides for a three-stage procedure:
The taxpayer has three years to lodge a so-called dispute settlement complaint after the first knowledge of the double taxation.
If all states involved agree that double taxation exists, an amicable agreement must be reached within two years (mutual agreement phase). Otherwise, an advisory committee is set up, which issues a recommendation for the solution of double taxation within six months (dispute settlement or arbitration phase). The same applies if at least one state does not reject the complaint. If the states concerned do not reach a decision within six months, the complaint is deemed to have been accepted and the communication phase begins. If a settlement of the dispute is necessary and the States concerned do not set up the advisory committee in due time (maximum 120 days after the request), the taxpayer can demand this in a Fiscal Court procedure.
The Committee's recommendation is binding on the participating EU Member States. In deviation from the procedure described here, however, they may also agree on alternative procedures for resolving double taxation disputes. This includes, in particular, the establishment of a permanent body to resolve double taxation cases instead of a case-by-case advisory committee. This is a clear acceleration of the procedure, especially in large countries where there are extensive business relationships between the respective companies and where this results in a high number of double taxation cases.
The newly chosen procedural framework is open to future developments. For example, current agreements within the framework of the Multilateral Instrument (MLI) for the adjustment of bilateral double taxation agreements to the OECD BEPS agreements can also be taken into account without the need for further amendments to the law. The same applies to any further adjustments to the agreements that may result in the future.
The Draft Law could be found at the following link:
Link German Implementation Act
Edited by Stefan im Schlaa; Attorney-at-Law, Tax