Germany agrees with UK and Switzerland on Arbitration Procedures to resolve Double taxation

Due to an increased number of long-lasting Mutual Agreement Procedures not solved within an appropriate period of time yet, the need for a (mandatory and terminating) arbitration procedure in international double taxation cases becomes more and more obvious and relevant. The German Double Tax Treaties with the US, Austria, Sweden, Canada and France already provide for (mandatory or voluntary) Arbitration procedures with regard to all kinds of Double Taxation not solved in time during a Mutual Agreement Procedure. Beside, the European Arbitration Convention stipulates a mandatory arbitration with regard to a Double taxation arising from a transfer pricing correction. More recently, the German tax administration has agreed on two further Double Tax Treaties with a general Arbitration clause.

Double Tax Treaty with UK

The new Double Tax Treaty (DTT) agreed between Germany and UK on March 30, 2010 became effective as of December 30, 2010. Amongst other changes, the revised Treaty and the newly introduced Article 26 Para. 5 respectively provide for a mandatory arbitration procedure if a possible double taxation cannot be resolved within (in principle) a 2 years-period beginning with the initiation of the respective Mutual Agreement Procedure. Article 26 Para. 5 DTT itself does not provide for specific procedural rules. Instead, the further details shall be specified by Germany's and UK's competent authorities.
On October 10, 2011, Germany's Ministry of Finance published a respective Mutual Agreement concluded between the competent authorities on September 20, 2011. This Mutual Agreement provides for detailed rules and procedures regarding the arbitration process and shall apply to all pending Mutual Agreement Procedures. In short, it amongst others addresses the following topics:

  • Application and Initiation of the Arbitration Process
  • Determination of the questions to be resolved (so-called "Terms of Reference")
  • Appointment of the Arbitrators
  • Legal principles for the Arbitrator's decision
  • Possibility of a shortened "streamlined" Arbitration process
  • Organisational issues (location of panel meetings, administrative personal and support, costs)

The Mutual Agreement covers a number of practical and procedural issues we experienced in a former arbitration procedure based on the European Arbitration Convention and which had not been addressed so far. However, some problems which may arise during an arbitration procedure are still unsolved (e. g., the question of the burden of proof, the qualification of the arbitrators, the taxpayer's right in case of a non-compliance of the competent authorities with the agreed deadlines and other procedural steps; for further details and to those with German language skills we refer to our articles "Bödefeld/Kuntschik, Verständigungs- und Schiedsverfahren nach dem EU-Schiedsabkommen – Theorie und Praxis" in IStR 2009, p. 268 ff. and "Bödefeld/Kuntschik, Schiedsverfahren nach DBA" in IStR 2009, p. 449 ff.). These issues may possibly be addressed later on when the competent authorities gained more practical experiences with arbitration procedures. With regard to this, the Mutual Agreement also allows that the agreed rules may be further amended or updated by a respective exchange of letters of the competent authorities, if necessary.

Double Tax Treaty with Switzerland

On September 21, 2011 the Bundestag (Germany's Parliament) adopted the ratification act in order to ratify the revised Double Tax Treaty (DTT) with Switzerland as amended by a protocol agreed between Germany and Switzerland on October 27, 2010. The ratification act has meanwhile also been confirmed by the Bundesrat (Germany's second chamber) on October 14, 2011. The revised Treaty does not only provide for publicly discussed amendments like the extension of the exchange of information or the reduction of the withholding tax rate on dividends to 0% in case of a minimum participation of 10% for at least 12 months. Additionally, the newly introduced Article 26 Para. 5, 6 and 7 DTT Switzerland now stipulates a mandatory arbitration procedure if a Mutual Agreement Procedure cannot be successfully concluded within (in principle) 3 years.
In order to become effective, the Treaty still requires the exchange of the respective ratification deeds. The new Arbitration clause shall then apply to all Mutual Agreements Procedures pending or initiated on the effective date. Thereby, Article 26 DTT Switzerland does not provide for further details regarding the Arbitration process. These details shall be specified by the competent authorities in a respective mutual agreement as well. This mutual agreement has not been concluded yet but may provide for similar rules as agreed in the Mutual Agreement between Germany and UK dated September 20, 2011. We expect that the potential Arbitration makes Mutual Agreement Procedures with Switzerland more practical.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.