Germany UK Double Taxation Treaty

Germany has signed more than ninety-five double taxation treaties and this extensive treaty network includes the Germany – UK double taxation treaty, allowing for a single point of taxation for individuals and companies deriving income from both jurisdictions.

A double taxation treaty is a bilateral agreement between two countries that aims to provide solutions for resolving any double taxation issues that may arise regarding passive and active income. The treaty will specify the manner in which one country can apply taxes on income as well as where the income will be taxed, according to its origin. The agreement can also provide for reduced tax rates on dividends. 

Both the United States and Germany have signed many such treaties. One of our lawyers in Germany can give investors detailed information on the conventions. While there are many implications as per the future of the United Kingdom pending its removal from the European Union, it is unlikely that the double tax treaties, including the one signed with Germany, will be affected. One of our lawyers in Germany can give investors more information on this matter.

In this article, we present the main provisions included in the double taxation convention between Germany and the United Kingdom and we answer some of the most common questions regarding taxation under this regime.

The agreement on avoidance of double taxation between Germany and the UK

Germany has strong trade and investment relations with the United Kingdom which is why the first double taxation treaty between the two countries dates back to 1964. In 2010 the Germany-UK double taxation agreement was updated and it now incorporates the Organization for Economic Co-operation and Development’s requirements about the exchange of tax information. The convention was enforced at the beginning of 2011 in Germany and on April 1^st for the corporate tax and April 6^th, 2011 for the income and capital gains tax in the United Kingdom. The Agreement was also amended through a protocol signed by the countries in 2014 and entered into force in 2015.

One of our attorneys in Germany can provide interested individuals with complete information on the amendments that have taken place.

The key issues laid out in the Convention for the avoidance of double taxation between the UK and Germany include the following:

• • the persons covered: these are residents of both states, meaning the individuals/companies considered residents for taxation purposes.
• • the taxes covered: these are taxes imposed by both parties, mainly the personal income tax and the corporate tax.
• • the permanent establishment: the provisions extend to a place of management, a branch, office, factory, workshop as well as a few other types of establishments.
• • the profits: the treaty will apply for the purpose of taxing business profits, income from immovable property, dividend income, profits from shipping and air transport as well as others.
• • other income: different categories of income can also include the directors’ fees and income from pensions.

Income that is not clearly defined or specified in the articles of the Convention is taxable only in the state in which it arises. However, this provision does not apply in the case of income paid from trusts or estates of deceased individuals that are under administration. One of our lawyers can give you information about the situation in which the income derived from trusts or estates of this type of paid to a German resident beneficiary by trustees who are UK residents.

Branch directors in Germany or the United Kingdom may be taxed by a signed state: their fees and other similar payments derived by an individual who is a resident of one of the Contracting States and engages in the said activities in the other State for a company may be taxed in the other state where the company engages in its activities.

A special article in the treaty provides for the specific taxation of visiting teachers, professors, and students in one of the Contracting States. In this situation, the individual will be exempt from taxation in the first state for the remuneration he/she receives in the second state for this type of activity (this provision applies for a period that does not exceed two years and for individuals who engage in research activities or teaching activities in a university, college, school or other cultural or educational institution). Special articles in the Agreement also apply to sportsmen and artists. 

Profit repatriation according to the Germany-UK double tax treaty

The provisions on withholding taxes of the previous double taxation agreement were revised and new amendments have been introduced with respect to the UK and German dividend, interest, and royalties taxes. According to the new treaty, dividends no longer include all rights, meaning a German investment fund will now benefit from reduced rates when distributing dividends to a UK company. The tax rates applied to the distribution of dividend payments have also been reduced:

• - 5% under the participation exemption clause,
• - 10% if the recipient is a pension fund,
• - 15% in all other cases.

The taxation of interests and royalties paid by the UK or German companies remains the same, such payments being exempt from taxation in the country they are paid from. However, the interests derived from loans or from profit-sharing bonds will be taxed in the country they are issued in accordance with the local legislation.

As far as capital gains are concerned, the ones derived by a resident of one of the states from the alienation of property situated in the other state can be subject to tax solely in that other state. 

The taxation of employment income under the Germany-UK double tax treaty

According to the 1964 double taxation agreement between Germany and the United Kingdom, a UK or a German resident working in the other state for more than 183 days in a calendar year, the employment taxes will levy by the other state. This provision will help certain employees to retain their allowances within the country they work in.

A new article was also introduced with respect to the taxation of offshore activities. Article 20 in the convention provides the circumstances a company is considered to have a permanent establishment in the other state where it carries out offshore activities.

The Agreement for the avoidance of double taxation between Germany and the UK allows for reduced tax rates and for a single point of taxation for profits derived from one jurisdiction. The fact that companies and individuals are not subject to the double taxation of the same income in both countries encourages bilateral relations between these two powerful states in Europe.

For information about all the changes brought to the double taxation agreement with the United Kingdom, please contact our lawyers in Germany. We can provide complete details about the ongoing taxation regime under the treaty and the changes that could take place for investors from the United Kingdom in Germany once the effects of the UK’s departure from the EU come into force.