Germany USA Double Taxation Treaty

Updated on Friday 14th September 2018

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A double tax treaty (DTA) establishes the framework within which two countries agree to avoid double taxation between them for individuals or companies that derive income from both jurisdictions.

Germany is one of the countries that have signed a large number of double tax treaties over the year, thus creating favorable taxation exemptions for foreign companies that derive income both from a German source, for example, a branch in Berlin or München, and in their country of origin.

The team of experts at our law firm in Germany can help foreign investors who are just entering the market understand the various applicable taxation principles.

What is double taxation relief in Germany?

The double tax treaties signed by Germany follow the OECD model and contain provisions that allow for the relief of double taxation on all types o income. Moreover, they limit the rights of taxation for each signatory state so as to protect against discriminatory taxation.

In order to benefit from the reduced withholding tax rate on dividends, companies that receive the dividend payment will need to present a certificate issued by the Federal Central Tax office in order to prove that they qualify for the tax exemption.

Germany has signed DTAs with more than ninety countries worldwide. If you would like to know more about the principles of double taxation relief with another jurisdiction, you can reach out to our team of attorneys in Germany.

The purpose of the Germany-USA double taxation treaty

The double taxation treaty or the income tax agreement between Germany and the United States of America entered into force in 1990 and it serves as an instrument for the abolition of double taxation on income earned by US and German residents who do business in both countries. The Germany-US double taxation agreement also contains provisions about the prevention of tax evasion. The agreement is also a successful tool for promoting economic cooperation between Germany and the United States and is meant to encourage businessmen to invest in the contracting parties.

What are the taxes for which the treaty applies?

The taxes covered by the double tax treaty between Germany and the United States include the following:

In the case of Germany: the income tax, the corporate tax, the trade tax, and the capital tax.

In the case of the United States: the federal income taxes, the excise tax imposed on insurance premiums paid to foreign insurers.

For the united states, a set of exemptions apply in case of the taxes imposed by the Internal Revenue Code. The accumulated earnings tax, the personal holding company tax, and the security taxes are excluded.

The treaty also applies to identical or similar taxes imposed in addition or in place of the ones mentioned above, after the signature date of the double tax treaty.

For the purpose of the treaty, a resident company in either of the two states is one that has its place of management or incorporation in that country. A permanent establishment that can benefit from the provisions of this treaty includes a branch in Germany, a factory or workshop, an office or other establishments such as mines, quarries, oil and gas wells or establishments for the extraction of natural resources.

For details about setting up a company, you may rely on our German law firm.

Business profit taxation under the Germany-US double tax treaty

The Germany-US double taxation agreement establishes the manner in which business profits derived by German or US companies are taxed in the other country. The agreement establishes that companies will only be taxed in the country the company is registered in, unless the company has a permanent establishment in the other country, case in which the permanent establishment’s profits will be taxed in the other country. However, both the US and German companies will benefit from a tax deduction for research and development expenses. These deductions will apply to all companies no matter the country the expenses are incurred.

With respect to the taxation of dividends in both Germany and the United States, the double taxation agreement provisions that the dividends paid by a company registered in one of the contracting states may be taxed in the other state. However, the dividend tax may also be applied in the company’s home country, case in which double taxation will occur. In this case, the treaty provides that the tax will be levied at a maximum 5% tax rate of the gross amount of the dividends if the recipient owns at least 10% of the voting power in the company paying the dividends. In all other cases, the dividend tax is 15%.

With respect to the capital gains tax, the double taxation treaty signed by Germany and the United States provisions that a German company holding real estate in the United States may be taxed in the United States. The same provision applies to US companies holding real estate in Germany.

The taxation of individuals according to the Germany-USA double tax treaty

The income resulted from rendering personal services by German sole traders in the United States will be exempt from paying the income tax in the United States. US sole traders will benefit from the same treatment in Germany. US and German employees will also be exempt from paying the personal income tax if they are in the other country for 183 days maximum during a calendar year and if the income is paid by a non-resident company.

For additional information about the double taxation treaty with the United States, please contact our German attorneys.