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German Federal Constitutional Court permits tax treaty overrides


German Federal Constitutional Court confirms tax treaty overrides are permissible under the constitution. Taxand Germany discusses this update.

The issue of tax treaty overrides as an instrument to safeguard Germany’s right to tax, contrary to existing double tax treaties, has been under debate for several years. The discussion has been fueled by the German Federal Tax Court voicing substantial doubts about the constitutionality of such mechanisms. Now, the Federal Constitutional Court has – against all expectations – confirmed that tax treaty overrides are constitutional.

Treaty overriding, i.e. the unilateral nullification of provisions contained in double tax treaties (DTTs), has been widely used by the German legislature in recent years. Most of these provisions are contained in the German Income Tax Act (Einkommensteuergesetz) and the Corporate Income Tax Act (Körperschaftsteuergesetz), and they typically constitute ‘switch-over’ clauses. 

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Taxand's Take

In view of the Federal Constitutional Court’s decision, we expect the German legislature to increasingly unilaterally insert treaty override provisions in the future. This may also affect the German transfer pricing provisions laid down in Sec. 1 of the German Foreign Tax Act (Außensteuergesetz) that were recently found not to be entirely in line with the arm’s length principle under Art. 9 of the OECD MC. 

Taxand's Take Author

Jens Schönfeld

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