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A recent decision of the Federal Tax Court has clarified the manner of calculating the per country limitation under German domestic and tax treaty law. The decision was rendered with respect to the tax treaty with Switzerland, but would appear generally applicable.

At issue was the provision in sec. 34c par. 1 EStG which states that the maximum credit allowable for foreign taxes paid in a particular country is determined by multiplying total German taxes payable (before credit) by the ratio of income from the country in question to worldwide income.

At issue was whether Swiss-source income which was exempt from tax in Switzerland (certain interest income)was to be counted as Swiss income for purposes of determining the above ratio. The Court held that it should indeed be included, which increased the maximum permissible credit for Swiss taxes paid on the taxpayer's rental and dividend income.

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