By Timo Turek, partner at Ypsilon International GmbH, Köln
Germany’s Federal Ministry of Finance published on 27 August updated guidance on international dispute resolution, replacing the existing guidance dated 9 October 2018.
For the first time, the new information sheet contains information on the dispute resolution procedure under the EU Double Taxation Agreement Dispute Settlement Act. Furthermore, comprehensive additions have been made in section A (General), and additions have also been made to the mutual agreement procedure and the dispute resolution procedure.
Mutual agreement procedure (section B of the information sheet)
The legal basis for the mutual agreement procedure is regulated in the double taxation agreement, article 25. The procedure is initiated at the application of the taxpayer. The application must be filed with the tax authority of the taxpayer’s state of residence. The request can be made if the taxpayer learns of a measure that leads to double taxation.
In the update of the information sheet, the tax authorities have made several adjustments.
According to paragraph 58 of the information sheet, an application for a mutual agreement procedure is only considered to be within the time limit if the German tax administration (BZSt) has already received “all” the necessary information and documents with the application. In our opinion, this position is not covered by the law and should therefore be rejected.
On the other hand, it is helpful that requests for mutual agreement procedures can be made directly in the common working language of the competent authorities according to paragraph 62. This is usually English. However, the BZSt and the relevant foreign tax authority must agree to this.
Dispute settlement procedures (section E of the information sheet)
The dispute settlement procedure is a three-stage proceeding under the EU Double Taxation Agreement Dispute Settlement Act.
In the first stage, the taxpayer files a claim stating that double taxation has arisen from a situation that has been generated.
In the second stage, the tax authorities of the countries involved negotiate to find a solution to the double taxation.
If the second phase does not lead to a solution, an arbitration commission is set up in the third phase, which draws up a proposal for a solution and submits it to the competent authorities. However, this proposal is not binding.
In the leaflet, the Federal Ministry of Finance has explained several points.
The dispute settlement procedure under the EU Double Taxation Agreement Dispute Settlement Act is a procedure for settling disputes between the Federal Republic of Germany and one or more other Member States of the European Union. If third countries are also involved in the matter, the procedure cannot be applied.
In paragraph 146 it is stated that the procedure is applicable for the first time to disputes commencing in years starting on or after 1 January 2018. If complaints concern both dispute years prior to 1 January 2018 and dispute years thereafter, the competent authorities of both countries may decide to apply the procedure also to years prior to 1 January 2018.
The application must be submitted to all competent authorities of the EU Member States concerned at the same time. There are simplifications for natural persons and small enterprises. Taxpayers only have to submit the application documents to the competent authority of their country of residence. The definition of small enterprises is based on section 28 of the EU Double Taxation Agreement Dispute Settlement Act and the Directive 2013/34/EU.
If all member states admit the complaint, the authorities are mandated to resolve it. The agreement must be reached within a period of two years. If the dispute has not been resolved within the deadline, the authorities are obliged to inform the taxpayer in writing. The taxpayer may then request in writing the appointment of an advisory committee. A period of 50 days from receipt of the notification must be observed for this purpose. The costs of the arbitration commission are borne by the member states.
The arbitration commission shall notify the authorities of a solution within a period of six months. The authorities may deviate from this solution. If no decision is reached within the six-month period, the authorities are bound by the advisory committee’s solution.
General information (section A of the information sheet)
In section 1.2, the relationship between the procedures is now presented. A special order of precedence only exists insofar as the procedure according to the EU Double Taxation Agreement Dispute Settlement Act is to be applied with priority to matters that arose in a dispute year that began after 1 January 2018 (paragraph 10).
A mutual agreement procedure can be conducted in parallel with a domestic judicial remedy. However, a mutual agreement solution is only concluded if all judicial remedies have been withdrawn (paragraph 11 f.).
If a taxpayer has already applied for a procedure under a double taxation agreement, an application for another procedure will be rejected unless the application made earlier under the double taxation agreement is withdrawn. If, on the other hand, two procedures are applied for in parallel, the BZST will set a reasonable deadline within which the taxpayer must choose one of the two procedures (paragraph 9).
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