Changes to a double taxation agreement do not lead to the realization of the disentanglement facts and taxation, according to a ruling by the Finance Court of Münster on August 10, 2022.
Double Taxation Agreements (DTAs) play an essential role in international tax law. The Finance Court of Münster has now made it clear in its judgment of August 10, 2022 (Ref. 13 K 559/19 G,F) that an amendment to a bilateral taxation agreement does not lead to the realization of the disentanglement facts according to § 4 para. 1 sentence 3 EStG, explains the law firm MTR Rechtsanwälte, which represents its clients in tax law and also in international tax law.
In the underlying case, the two limited partners of a German-based KG held shares in a Spanish corporation (S.L.). The commandite 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. reported in its balance sheet as of December 31, 2012, that tangible assets accounted for about 59 percent of the balance sheet total. In 2012, the DTA between Germany and Spain was supplemented by a provision stating that capital gains from shareholdings, whose active assets consist of at least 50 percent of tangible assets, grants the state where the tangible assets are located an additional taxation right. The due tax can, in turn, be credited against the income tax of the country where the limited partner resides.
The responsible tax office viewed the amendment of the DTA as a passive-triggered disentanglement of the hidden reserves in the share of the limited partner living in Switzerland and subjected them to taxation according to § 4 para. 1 sentence 3 EStG.
The KG successfully opposed this. The FG Münster found that the restriction of the taxation right in the sense of § 4 para. 1 sentence 3 EStG was not fulfilled. It reasoned that the amendment of the DTA could not be attributed to the plaintiff KG or the limited partners. This is only the case if an action attributable to the taxpayer leads to the exclusion or restriction of the taxation right in Germany, stated the FG Münster, which has allowed an appeal to the BGH.
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