Australia and Germany overnight signed a new 21st century tax treaty, which will reduce tax impediments to increased bilateral trade and investment and improve the integrity of the tax system.
This more modern tax treaty will create new opportunities for Australian business and help ensure that multinational corporations pay their fair share of tax.
It replaces a previous Double Taxation Agreement between Australia and Germany signed in 1972.
Key features of the new treaty include:
- Reduced withholding tax rates, helping to create a more favourable bilateral investment environment and making it cheaper for Australian business to access foreign capital and technology.
- New arbitration rules, as well as a range of rules to prevent potential double taxation, which will improve tax certainty for business.
Importantly, the new treaty gives effect to the OECD/G20 Base Erosion and Profit Shifting (BEPS) recommendations, demonstrating the Australian Government’s continued commitment to tackling international tax avoidance practices.
Modernised tax treaty arrangements will further foster the already strong business relations between Australia and Germany.
Senator Cormann signed the new treaty with German Finance Minister Dr Wolfgang Schäuble – who has championed countries taking concrete actions to address BEPS practices to ensure that everyone pays their fair share of tax - and Minister Böhmer, co-chair of the Australia-Germany Advisory Group – who has worked to ensure that a new treaty was delivered this year.
The new treaty will enter into force after both countries have completed their domestic requirements and instruments of ratification have been exchanged.
Legislation will be introduced into the Australian Parliament as soon as practicable to give the revised treaty the force of law in Australia.
A copy of the text of the new treaty is available on the Treasury website.
Main features of the new treaty
Anti-abuse and prevention of non-taxation rules
The preamble clarifies that the express purpose of the treaty is to eliminate double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements.
Treaty benefits will be denied if a principal purpose of a person is to take advantage of the treaty.
Nothing in the treaty will prevent either country from applying their domestic laws which are designed to prevent the evasion or avoidance of taxes.
The source (of the income) country will not be obliged to provide treaty benefits for income derived by a temporary resident of the other country if that other country exempts that income because of the individual’s status as a temporary resident.
Australian income tax, fringe benefits tax and resource rent taxes are expressly covered.
German income tax, corporate income tax, trade tax and capital tax are also expressly covered.
Treaty benefits will be available for income derived through fiscally transparent entities but only to the extent that the income is treated as the income of a resident of Australia or Germany under domestic law.
Treaty benefits will be available for income received by Australian managed investment trusts and certain German collective investment vehicles.
The definition of ‘permanent establishment’ has been strengthened and supplemented by new integrity provisions, which will broaden the range of circumstances in which both countries can tax business profits.
Business profits derived through permanent establishments will be attributed to those permanent establishments based on the ‘relevant business activity approach’.
The rules for business profits derived through a permanent establishment will apply to profits derived through business trusts, even when those profits are distributed to a trust beneficiary.
Transfer pricing adjustments
A 10 year time limit will generally apply for making transfer pricing adjustments, with a correlative adjustment to be made to the profits of an associated enterprise so that the transfer pricing adjustment does not result in double taxation of the same profits in the hands of two associated enterprises.
Shipping and air transport
Profits from international shipping and air transport operations will be taxable only in the country of residence of the operator but may also be taxed in the other country where the transport is between places in that other country.
The definition of ‘immovable property’ will enhance both countries’ ability to tax income derived from the use of immovable property, including mining rights.
Dividends may be taxed in the source (of the dividend) country up to the following limits:
- Zero for intercorporate dividends paid to publicly listed companies, or subsidiaries thereof, or unlisted companies in certain circumstances, that hold 80 per cent or more of the paying company;
- 5 per cent of the gross amount of the dividend for intercorporate dividends paid to companies that hold 10 per cent or more of the paying company;
- 15 per cent for all other dividends.
Interest may be taxed in the source (of the interest) country up to the following limits:
- Zero for interest derived by government bodies, central banks and unrelated financial institutions; and
- 10 per cent for all other interest.
Royalties may be taxed in the source (of the royalty) country up to a limit of 5 per cent of the gross royalty.
The right to use industrial, commercial or scientific equipment has been removed from the revised definition of ‘royalties’.
Alienation of property
Comprehensive rules will govern the allocation of taxing rights between Australia and Germany over income, profits or gains from the alienation of different categories of property.
Income, profits or gains arising from the disposal of immovable property or interests in land-rich entities may be taxed in the country where the immovable property/land is located.
Individuals who change their tax residence will remain taxable in their former country of residence on certain capital gains from the alienation of property.
Pensions are generally taxable only in the country of residence of the recipient. However:
- Social security benefits first paid after 31 December 2016 may also be taxed by the source country but the source country tax is limited to 15 per cent of the gross payment;
- Contributory pensions first paid after 31 December 2016 may be taxed in the source country if the pension is attributable to contributions that received certain tax concessions in the source country for at least a 15 year period;
- War persecution and similar pensions are exempt from taxation; and
- Government service pensions are taxable only in the country of residence if the individual is also a national of that country – otherwise, the pension is taxable only in the source country.
Entertainers and sportspersons
The income of visiting entertainers and sportspersons will be exempt from tax in the country visited if the visit is funded by public funds of the individual’s country of residence.
Visiting teachers and professors
The income of visiting teachers or professors will be exempt if funded by public funds of the individual’s country of residence or a tax exempt charity.
The source country may tax certain other income not expressly dealt with in the treaty (such as lump sum retirement payments).
Germany’s capital tax
Rules are included prescribing the circumstances under which Germany may apply its capital tax to capital owned by Australian residents.
Overpaid withholding tax refunds
Rules are included for seeking a refund of overpaid withholding tax, including the requirement that the refund be requested within 4 years of receiving the relevant income.
Non-discrimination rules will prevent Australia and Germany from treating each other’s nationals and businesses less favourably – for tax purposes – than they would treat their own nationals or businesses in similar circumstances.
Mutual agreement procedure
Taxpayers will have three years in which to seek the revenue agencies’ assistance in the resolution of tax disputes arising from the application of the treaty. Taxpayers will be able to refer tax disputes that remain unresolved after two years to independent and binding arbitration.
Exchange of information and protection of personal information
The revenue agencies of Australia and Germany will be authorised to exchange taxpayer information in respect of all taxes imposed in either country. Strict rules will govern the protection of tax information exchanged in relation to individuals.
Assistance in the collection of taxes
The revenue agencies will assist each other in the collection of outstanding tax debts.