“Treaty Override” Unconstitutional?

Stefan Winheller, LL.M. Tax (USA) – German Attorney at Law, Certified Tax Law Specialist

WINHELLER Attorneys at Law

Frankfurt am Main, Germany

Germany has concluded a Double Taxation Treaty with a large number of countries. At the same time, the German tax legislator more and more frequently thwarts Double Taxation Treaty regulations advantageous to the taxpayers by simple legal standards.

Taxpayers, who depend on rules of the relevant Double Taxation Treaty favorable to them, may not rejoice too quickly. German law provides numerous rules, which over ride the advantages of the Double Taxation Treaty (“Treaty Override”), making them subject to further requirements, which are not required by the Double Taxation Treaty.

Until now, treaty overrides were regularly accepted by case law. All the more remarkable is the current decision of the highest German fiscal court: The Federal Finance Court is of the opinion that the treaty override in Section 50d(8) of the German Income Tax Act infringes Article 25 of the German Basic Constitutional Law, which grants priority to international law over simple legal national standards and thereby also to the Double Taxation Treaty concluded with other countries. A justification of the treaty override also does not result in the taxpayer obtaining “white income” if applicable without such a treaty override, that is, which is taxed neither in Germany nor in the other Double Taxation Treaty-contracting state.

NOTE: Because all treaty overrides are usually justified with the argument that they serve the purpose of preventing white income, the decision of the Federal Finance Court has great significance far beyond the regulation of Section 50d(8) of the German Income Tax Act. One will now have to wait and see whether the Federal Constitutional Court follows the opinion of the Federal Finance Court. If the German treaty overrides were actually invalid, enormous room for maneuvering would be opened up for the taxpayers – in any case unless Germany prevents white income by appropriate rules in the Double Taxation Treaty itself.

Federal Fiscal Court, Ruling of January 10, 2012, Case I R 66/09.

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