Changes to a double taxation agreement do not lead to the realization of the hidden reserve dissolution clause and taxation according to a judgment by the Finance Court of Münster dated August 10, 2022.
Double taxation agreements (DTAs) play a significant role in international tax law. On August 10, 2022, the Finance Court of Münster made it clear through a judgment (Az. 13 K 559/19 G,F) that a change to a bilateral tax agreement does not lead to the realization of the hidden reserve dissolution clause according to § 4 Para. 1 Sentence 3 EStG, explains the commercial law firm MTR Rechtsanwälte, which represents its clients in tax law as well as in international tax law.
In the underlying case, the two limited partners of a KG based in Germany held shares in a Spanish capital company (S.L.). The limited partnership shares were attributed to the special business assets II of the KG. One of the limited partners lived in Germany, the other in Switzerland.
The Spanish S.L. stated in its balance sheet as of December 31, 2012, that immovable property made up about 59 percent of the balance sheet total. In 2012, the DTA between Germany and Spain was supplemented by a regulation stating that capital gains from participations, whose active assets consist of at least 50 percent immovable property, grant an additional taxation right to the state where the immovable property is located. The tax due can subsequently be credited against the income tax of the country where the limited partner resides.
The responsible tax office viewed the change in the DTA as a passive dissolution of the hidden reserves in the shares of the limited partner residing in Switzerland and subjected them to taxation pursuant to § 4 Para. 1 Sentence 3 EStG.
However, the KG successfully contested this. The FG Münster determined that the limitation of the taxation right in the sense of § 4 Para. 1 Sentence 3 EStG was not fulfilled. In its reasoning, it stated that the change in the DTA could not be attributed to the suing KG or the limited partners. This is only the case if an action attributable to the taxpayer leads to the exclusion or limitation of the taxation right in Germany, said the FG Münster, which allowed the appeal to the BGH.
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