Cross-Border Lawyers’ Interpretation: Key Points in Handling Cross-Border Tax Disputes in Germany

1. Mechanisms for Dealing with Double Taxation

Where double taxation arises, it is common practice to pursue tax litigation while also initiating a mutual agreement procedure with binding arbitration under an applicable tax treaty or under the EU Arbitration Convention. An objection / appeal may be temporarily suspended until the mutual agreement procedure reaches a solution to the double taxation issue, after which the matter may proceed further. Conversely, the objection / appeal may also continue actively while the mutual agreement procedure remains pending, with both tracks proceeding in parallel.

If Germany causes double taxation by adjusting the taxable income of its own taxpayer, there is no urgent legal need to keep the tax period open. The reason is that Section 175a of the German Fiscal Code, together with many tax treaties, provides that Germany may reopen the tax assessment procedure regardless of limitation periods.

The same applies where the original taxable income adjustment giving rise to the double taxation was made abroad. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, namely the Multilateral Instrument on Base Erosion and Profit Shifting, as well as the EU Tax Dispute Resolution Directive, have not significantly changed this situation. Germany has enacted the Dispute Resolution Act to transpose the EU Tax Dispute Resolution Directive into domestic tax law. That Act contains a number of disadvantages for taxpayers, who lose several rights that would ordinarily be available in tax litigation proceedings. For that reason, tax litigation is not recommended. Instead, it is preferable to use the objection / appeal procedure in combination with the mutual agreement procedure under the relevant tax treaty or under the EU Arbitration Convention.

1. Application of the General Anti-Avoidance Rule / Specific Anti-Avoidance Rules in Cross-Border Situations

The German general anti-avoidance rule under Section 42 of the German Fiscal Code has been in force for decades. Tax authorities occasionally invoke that rule to adjust taxable income or challenge a taxpayer’s position. However, the Federal Fiscal Court has consistently rejected most such cases and has confined the scope of Section 42 of the German Fiscal Code to situations where no more specific provision is applicable. In most cases, the German tax courts have refused the application of Section 42 because a more specific rule existed.

1. Disputes Concerning International Transfer Pricing Adjustments

Over the past ten years, transfer pricing adjustments made by Germany have frequently been challenged on multiple grounds. According to statistics published by the OECD, Germany has for many years been the country with the largest number of pending mutual agreement procedure cases. Over the past decade, the number of transfer pricing cases heard by the German tax courts has also increased, with most of them involving:

domestic and cross-border financial transactions;

business restructurings;

the impact of year-end adjustments on customs value;

the transfer pricing treatment of parallel imports in the pharmaceutical sector.

Recent data even shows that a small number of cases have been challenged under the framework of the EU Tax Dispute Resolution Directive.

1. Unilateral / Bilateral Advance Pricing Arrangements

Advance pricing arrangements are a commonly used tool and follow the general process, including pre-filing meetings, submission of the application, information requests and responses, and final negotiations between the relevant tax authorities.

1. Litigation Relating to Cross-Border Situations

There is no significant difference in the number of disputes arising from various cross-border situations, such as withholding tax, private equity, and transfer pricing. No clearly new type of litigation has emerged in this area so far.

Disclaimer

Laws and procedures may change. This article provides general information only and does not constitute legal advice. If you encounter a legal dispute overseas, please contact us immediately to consult a professional foreign-related lawyer.