New protocol to the UK-Germany double tax treaty signed

New protocol to the UK-Germany double tax treaty signed

The UK and Germany have agreed to amend their double tax treaty to bring it into line with the OECD BEPS recommendations on prevention of treaty abuse.

Mario Petriccione




On 12 January 2021, the UK and Germany signed a new protocol to the 2010 Double Tax Treaty (DTT) together with a joint declaration affirming their willingness to enter into negotiations for the further amendment of the DTT by 31 December 2021. Germany is only using the Multilateral Instrument (MLI) as a mechanism to amend a small proportion of its circa 100 income tax treaties, opting instead to amend its treaties with countries like the UK and Netherlands on a bilateral basis. The protocol makes changes to reflect the parties' intention to incorporate the OECD BEPS Project minimum standard of preventing treaty abuse outside of, but consistently with, the MLI.

The key changes in the new protocol are:

  • Amendments to the title and preamble to reflect the intent of the parties that the treaty should not create opportunities for tax evasion and avoidance (e.g. through treaty shopping);
  • Insertion of Article 30A (Prevention of Treaty Abuse) containing a principal purpose test in accordance with the OECD BEPS minimum standard;
  • Consequential amendments to remove main purpose test provisions in Articles 10 (Dividends), 11 (Interest), 12 (Royalties) and 21 (Other Income) and to reflect those changes in Article 25 (Non-Discrimination);
  • Amendments to Article 5 (Permanent Establishment) to insert an anti-fragmentation rule in paragraph 4A consistent with the approach the UK has chosen to adopt where its other treaties have been amended using the MLI; and
  • Article 26 (Mutual Agreement Procedure) has also been amended so that there is no longer any exception qualifying the obligations of the competent authorities to implement any agreement reached irrespective of any time limits which may apply under the domestic law of the contracting states.

The protocol will enter into force once both countries have completed their legislative procedures and exchanged diplomatic notes, and will take effect in the UK, for income tax and capital gains tax, for any tax year beginning on or after 6 April in the year following entry into force, and, for corporation tax, for any financial year beginning on or after 1 April in the year following entry into force.

The treaty changes are unlikely to have a significant impact in the UK but may prompt additional scrutiny from the German tax authorities on the permanent establishment status of UK groups with substantial operations in Germany, particularly those not selling via a local German incorporated company.

The new protocol will come as a disappointment to UK headquartered groups hoping to see the five percent rate of withholding tax on certain categories of dividends reduced to nil to preserve the benefits previously available under the EU Parent-Subsidiary Directive. We understand that Germany were unwilling to renegotiate this aspect of the treaty whilst the UK-EU trade deal negotiations were ongoing and the joint declaration is intended to capture the parties’ intent to commence further negotiations during 2021.

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