GERMANY Law and Practice Contributed by: Alexander Gottstein, MTR Legal Rechtsanwälte
1. Sources and Principles 1.1 Domestic Sources of International Tax Law Key statutes include the Fiscal Code ( Abgabenord- nung , AO) as the procedural and general framework, the Income Tax Act ( Einkommensteuergesetz , EStG), the Corporation Tax Act ( Körperschaftsteuergesetz , KStG), the Trade Tax Act ( Gewerbesteuergesetz , GewStG), and the Foreign Tax Act ( Außensteuerge- setz , AStG). Additional rules apply in specific areas (eg, withholding taxes, transfer pricing, and reporting/ assistance obligations), often shaped by EU law and its domestic implementation. In practice, administrative guidance issued by the Federal Ministry of Finance ( Bundesministerium der Finanzen , BMF) and the Application Decree to the Fis - cal Code ( Anwendungserlass zur Abgabenordnung , AEAO) plays an important role. Case law – particularly of the Federal Fiscal Court ( Bundesfinanzhof , BFH) – clarifies open legal concepts and delineates the inter - action between domestic rules and treaty effects in individual cases. Double taxation agreements (DTAs) apply domesti - cally once they have been incorporated into German law through an enabling act pursuant to Article 59 (2) of the Basic Law ( Grundgesetz , GG). Section 2 AO reflects the application priority of DTAs in tax matters – where Germany has restricted or waived its taxing rights under a treaty, the treaty provisions must be observed when assessing German tax. 1.2 Hierarchy of Sources After incorporation, DTAs generally have the rank of ordinary federal statutes. Accordingly, the domestic conflict‑of‑laws principles apply: a later statute may, as a matter of German domestic law, deviate from an earlier treaty (“treaty override”) if the legislature acts deliberately and with sufficient clarity (lex posterior). The Federal Constitutional Court ( Bundesverfas- sungsgericht , BVerfG) has held that a treaty override can, in principle, be constitutionally permissible. At the same time, it is critical to distinguish between the domestic and international planes: even if a treaty override is valid domestically, it may constitute a
breach of international law (pacta sunt servanda) and trigger inter‑state consequences. Article 25 GG con - cerns the “general rules of international law” (eg, cus - tomary international law) and is not the decisive basis for the domestic rank of DTAs; that role is played by Article 59 (2) GG. 1.3 OECD Model/United Nations Influence on Treaty Practice Germany’s treaty practice largely follows the OECD Model Tax Convention (OECD MTC) and its commen - tary. DTAs commonly reflect OECD structures for per - manent establishments, business profits, withhold - ing tax articles, and mutual agreement procedures (MAPs). However, each DTA is a bilateral instrument: differences in wording, protocol provisions, or special articles can materially affect taxing rights in a given case. The UN Model can be influential in DTAs with develop - ing or emerging economies, often through compara - tively stronger source‑state taxing rights. The decisive point is always the text of the relevant DTA, including its protocol. 1.4 Multilateral Instrument Whether the Multilateral Instrument (MLI) modifies a particular German DTA (eg, anti‑fragmentation rules, dependent agent PE concepts, or dispute‑resolution provisions) depends on the positions taken by both contracting states (reservations and notifications) and on the applicable entry‑into‑effect rules (“matching”). Germany does not apply the MLI to all treaties, and effective dates may differ by treaty. In practice, an explicit treaty‑by‑treaty review (using the OECD matching database/positions) is required before relying on any MLI outcome.
2. Territoriality, Residence and Permanent Establishment
2.1 General Principle of Territorial Taxation Germany generally taxes residents on their worldwide income. Non‑residents are taxed only on specified German‑source income. The key domestic rules are Section 1 EStG (unlimited versus limited tax liability)
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