The tax treatment of investors who are resident in more than one country due to their business activities or family circumstances is extremely complex and can lead to multiple taxation of these investors. The reform of the Foreign Tax Act (so-called ATAD Implementation Act, Act on the Implementation of the Anti-Tax Avoidance Directive of 25 June 2021, Federal Law Gazette 2021 I, p. 2035) also gives little cause for optimism with regard to a structural adjustment of existing double taxation risks. It gives the impression that the legislator has not sufficiently considered the reality of life for many business families.
Typical initial case
Taxpayers with dual residence or multiple unlimited tax liability are increasingly finding their way into everyday tax life. Legal tax issues arise in many areas, e.g. in the context of national notification and co-operation obligations, preparation of national tax returns, qualification of capital investments, etc. Ultimately, these taxpayers and their respective tax authorities have to deal with legal issues and double taxation scenarios that may be contentious. From a German perspective, controversial legal and interpretation issues can affect taxpayers who also have a residence in Germany but whose centre of vital interests is in another DTA state (so-called "tie-breaker rule" according to Art. 4 para. 2 letter b DTA-MA).
Wealthy taxpayers in particular, who bundle their investments via low-taxed corporations, may be exposed to double taxation in Germany. This cannot be the legislator's intention. Nevertheless, this system is not set to change under the ATAD Implementation Act. Taxpayers with dual residency are treated as having unlimited tax liability for foreign tax purposes, even if the relevant DTA assumes tax residency only abroad. The unlimited tax liability for such cases of an intermediate company with an investment character under Section 7 para. 6 AStG old version or Section 13 para. 1 AStG new version is determined in accordance with Section 1 EStG. Furthermore, the direct application of a double taxation agreement (DTA) is to be excluded by section 20 para. 1 half-sentence 1 AStG, although the scope of the provision has not been conclusively clarified and poses challenges in practice.
The dual-resident investor in income tax law
Under national law, natural persons who are resident or ordinarily resident in Germany are subject to unlimited tax liability (Section 1 (1) sentence 1 EStG). A natural person can simultaneously have several residences within the meaning of Section 8 AO. § Section 8 AO, which may be located in Germany and/or abroad (see BFH of 24 August 2019, IStR 2019, p. 226). Unlimited tax liability is not excluded even if the foreign residence constitutes the taxpayer's centre of life (see BFH of 23 October 2018, IStR 2019, p. 318). In the opinion of the BFH, there is also no general principle in international tax law according to which an individual may only be treated as having unlimited tax liability by the state in which the centre of their vital interests is located.
The question of unlimited tax liability in Germany must be considered separately from the question of where a person is deemed to be resident under treaty law (see Art. 4 para. 1 sentence 1 OECD-MA). Therefore, the question of an individual's unlimited tax liability in Germany is not dependent on the provision in the DTA (see BFH of 23 October 2018, IStR 2019, 318). Consequently, the determinations under national law must be separated from those under treaty law, whereby there should also be no interdependencies between national and treaty law.
The dual resident investor in foreign tax law
According to the Foreign Tax Act, the person with unlimited tax liability is the subject of add-back for income from foreign intermediate companies (Section 7 (1) AStG old/new version). The term "unlimited taxpayer" is determined for natural persons in accordance with Section 1 EStG. Double-resident taxpayers are treated as unlimited taxpayers for the purposes of the regulations on add-back taxation if they are resident in Germany. According to the prevailing opinion, this also applies if, according to the relevant DTA, a taxpayer is only resident abroad because, for example, the centre of the taxpayer's personal interests is located there.
This is essentially justified by the fact that the Federal Constitutional Court classifies treaty overrides, i.e. the overriding of international treaty law by domestic law, as constitutional (see BVerfG ruling of 15 December 2015, 2 BvL 1/12 on Section 50d para. 8 sentence 1 EStG as amended on 15 December 2003). The provision of Section 20 para. 1 AStG, the wording of which was transferred unchanged into the new AStG reform law, thus overrides the direct application of the respective DTA. Although such an overriding legal consequence cannot be derived from the purpose of the AStG, the case law of the Federal Constitutional Court has finally put an end to the discussions about the scope of Section 20 para. 1 AStG. Double taxation, which results from the precedence of the national regulations in sections 7-18 AStG over the conflicting regulations of a double taxation agreement, has therefore been approved by the highest court and continues to correspond to the intention of the legislator.
Conclusion
If a dual-resident taxpayer holds its investments via a corporation subject to low taxation abroad, the provisions of the Foreign Tax Act apply.
Against this background, various implications arise for taxpayers from the interplay between foreign and income tax law. This interplay requires proper dovetailing and harmonisation of the respective national tax laws.
Yours TAXGATE Team will be happy to help you analyse and set up a lean, practical tax compliance system. In such cases, the common goal should be for taxpayers to be able to focus on building up their business assets and not just on complying with national tax regulations.
