If there is a double taxation agreement (DTA), double taxation is generally avoided by exempting foreign income with progression. Foreign income taxes may only be credited to the German income tax if the applicable DTA provides for a tax credit or if there is no permanent contract. A tax credit is only possible up to the amount of German income tax on the specific foreign income. In addition, the exemption from withholding tax on interest provided for in the 2015 DTA recognises that the 10% tax rate may be excessive given the cost of funds for certain types of companies. This will reduce investment costs between Australia and Germany and support the further growth of trade relations between the two countries. Under the 1972 ILC, the country of origin may levy a withholding tax rate of 10 per cent on royalty payments between Australia and Germany. The 2015 DTA lowers this tax rate to 5%. The main objective of the amendments to the 2015 DTA is to remove tax barriers and create a more favourable investment environment between Australia and Germany. A reduction in withholding taxes in certain circumstances will reduce investment and trade costs between the two countries and promote the further growth of business relations.
Stronger economic ties with Germany will not only give Australia significant strategic access to the European market, but will also reduce its dependence on the Chinese economy. “I am pleased that with this new double taxation agreement we have achieved fundamental improvements for German and Australian companies,” Böhmer said after the document was signed. She explained that this would improve economic relations between Germany and Australia, bringing Europe closer to the Asia-Pacific region – the world`s most dynamic and dynamic region in terms of trade. Background information: The current double taxation agreement between Germany and Australia entered into force in 1972, making it one of the oldest tax treaties in Germany. After the Chancellor`s visit to Australia in November 2014, the idea of revising it gained momentum. The negotiations were concluded within a few months. The outcome of these negotiations corresponds to Germany`s double taxation policy in important areas, which is in line with the OECD model. Germany is Australia`s second largest trading partner in Europe after Britain and, with a trade volume of around €9.8 billion in 2014, is currently the world`s twelfth largest trading partner. Around 480 subsidiaries of German companies operate a total of around 800 jobs in Australia and contribute to around 100,000 jobs in that country. Germany currently has double taxation treaties with the countries listed below: Usually, when a resident Australian company pays dividends, interest or royalties to a foreign entity, it is obliged to pay withholding tax – the income tax payable – on foreign payments (and vice versa).1 Withholding tax rates are 30% on dividends and royalties, and 10% on interest.2 These rates are determined by DTAs between Australia and a number of countries, including Germany. Together with Federal Finance Minister Wolfgang Schäuble and Australian Finance Minister Mathias Cormann, Minister of State Maria Böhmer signed a new German-Australian double taxation agreement in Berlin on 12th November in Berlin. The occasion was the visit of Australian Prime Minister Malcolm Turnbull, who met with Chancellor Merkel and Foreign Minister Steinmeier.
DTAs seek to avoid double taxation of profits by allocating taxing rights or by requiring credits to be granted for taxes paid in another country. For example, if a company based overseas makes business profits in Australia through a “permanent establishment” (PE), Australia is entitled to levy income tax on those profits (and vice versa). DTAs generally describe the circumstances in which a foreign resident is considered to be operating in Australia through a PE. Under the 1972 DTA, the country of origin may retain up to 10 per cent of the value of interest payments made between Australia and Germany. The new double taxation agreement between Australia and Germany has now entered into force. This demonstrates both countries` continued commitment to combating international tax avoidance practices. The minimum operating period for a construction site or a construction or installation project will also be increased from six to nine months. The circumstances in which the employment of an agent constitutes a permanent establishment have also increased. This now includes agents who “usually play the primary role leading to the conclusion of contracts that are regularly concluded without material change by the company.” In contrast, assembly projects are no longer included in the definition of a permanent establishment. More importantly, this includes a number of integrity measures introduced by the Commission in 2015. For example, the provisions on the prevention of contract splitting and fragmentation of companies linked to PEs adopt the recommendations of Action 7 of the BEPS report, which aim to prevent the artificial avoidance of EP status. In addition, the minimum holding periods required under the amendments to the dividend exemption adopt the recommendations of Action 6 of the BEPS report, which aims to prevent breach of contract.
This is the first agreement in Australia to reflect the OECD`s recommendations on base erosion and profit-sharing (commonly referred to as “BEPS”) for tax treaties. The changes introduced by this agreement will have an impact on current structures and future activities with German companies. It is also likely to be a model for Australia`s treaties in the future. National income tax legislation has been amended and replaced by various tax treaties with foreign countries to ensure that income is not taxed by more than one country. Germany has concluded DTAs for income tax with nearly 90 countries, including most industrialized countries. However, the DTAs were not concluded with Brazil and Hong Kong. On July 14, 2020, U.S. President Donald Trump issued Executive Order 13936 and signed the Hong Kong Autonomy Act 2020.
The 2015 DTA also extends the definition of “royalties” to payments made under the right to use spectrum and spectrum licences. The changes to the definition of CAPITAL will give Australian tax authorities more flexibility to levy taxes on local mining and other activities. These changes are based on Australia`s view that the current OECD model is not sufficient to deal with high-quality mobile activities, particularly those involving the use of “important equipment”. According to the 2015 DTA, this withholding tax rate is reduced for certain intercompany dividends, in particular: The withholding tax rate for dividends under the 1972 DTA is 15%. This is usually payable upon receipt of an unvalued dividend paid by an Australian-based company to a shareholder resident in Germany (stamped dividends paid by an Australian resident are not subject to withholding tax). The 2015 DTA provides for exceptions to this withholding tax if the interest comes from: Böhmer and Cormann are co-chairs of the Australia-Germany Consultative Group which, at the request of the two Heads of Government, has drawn up recommendations to intensify German-Australian relations. The Advisory Group presented its recommendations to Chancellor Merkel and Australian Prime Minister Turnbull on Friday (13 November) in Berlin. The refusal of exemption in back-to-back loan agreements is intended to prevent financial institutions from effectively transferring the benefit to a person or entity in the payer`s State Party that would not otherwise be entitled to the exemption. The new DTA will have an impact on investors and companies involved in cross-border transactions. This will also affect multinational companies with branches or assets in Australia and Germany. First, the new DTA lowers the withholding tax levied by the country of origin on royalties, certain types of interest and dividends. The new maximum rates are as follows: In addition to the changes mentioned, the new DTA involves many other changes and new regulations.
All companies and investors with cross-border activities should seek advice on the likely impact of their profits. For companies active in mining and mineral resource production that may be particularly affected by changes in the definition of “permanent establishment”, we strongly recommend that you consult your tax advisor in a timely manner to verify your cross-border tax status from 2017 onwards. 1Intelligence Tax Assessment Act of 1936, art. 128B, s6. 2 Influence Tax Act (Tax on Dividends, Interest and Royalties) 1974 (Cth). The 2015 DTA reinforces the definition of the EP in Article 5 by: For more information on the impact of the new tax treaty on your business, please contact one of our Australian tax authorities (see below). The Government has advanced this year`s federal budget announcement to May 3, 2016. In addition, the new DTA revises the concept of tax residence by the new DTA: the DTA provides for several additional activities that may constitute a permanent establishment (PE), provided that they are carried out for a certain minimum period and are not eligible for a specific exemption. B such as the exploitation of `essential equipment`, the exploration or use of natural resources and monitoring or advisory activities related to a construction site or a construction facility or project.
In practice, a German company that operates a mobile drilling platform at a mining site in Australia more than 183 days a year is considered an EP in Australia under the new rules. .