Update to UK/Germany double tax treaty

The UK and Germany have signed a Protocol to the 2010 UK/Germany Double Tax Convention which incorporates changes based on the OECD's multilateral instrument (MLI). The Protocol is not yet in force, pending completion of formal procedures in both countries.

At the same time, a joint declaration has been signed affirming the willingness of the UK and Germany to enter into negotiations to make further amendments to the DTT within 12 months of the end of the transition period under the UK/EU Withdrawal Agreement (31 December 2021). Given the fact that the Parent Subsidiary Directive will no longer apply to payments of dividends from Germany to the UK following Brexit, it is to be hoped that these further negotiations will result in the removal of potential withholding taxes on payments of dividends from Germany to the UK under the existing DTT.

Background

Following on from the OECD's BEPS Action Plan, the OECD developed the MLI to implement those BEPS recommendations which required changes to DTTs. The intention was to avoid the need for countries to enter into a plethora of bilateral agreements to make changes to their DTTs. Areas covered by the MLI include: Action 2 (Hybrids); Action 6 (Treaty abuse); Action 7 (PE status); Action 14 (Dispute resolution, Mutual agreement and binding arbitration).

The UK ratified the MLI and deposited its instrument of ratification with the OECD on 29 June 2018, meaning that the MLI enters into force on 1 October 2018. However, the MLI will only make changes to DTTs where both states have ratified the MLI and notified that the relevant DTT is a treaty covered by the MLI. The UK did not notify the UK/Germany treaty as a covered tax treaty as the treaty was subject to bilateral renegotiation.

Protocol amending the UK/Germany DTT

HMRC has now published the Protocol which will make changes to the UK/Germany DTT to bring it into line with the minimum standards required by the OECD BEPS project. In particular, the Protocol will amend the DTT's title and preamble consistently with changes proposed in the MLI and will insert into the treaty the principal purpose test (in article 30A) in place of the existing "main purpose" provisions that operate to exclude the reliefs that would otherwise be available under articles 10 (dividends), 11 (interest), 12 (royalties) and 21 (other income).

The Protocol will also incorporate into the permanent establishment article (article 3) the anti-fragmentation provision from article 13(4) of the MLI consistent with the UK's approach in other treaties amended by the MLI.  

In relation to the mutual agreement procedures, the Protocol will remove a qualification in article 26 to the disapplication of domestic time limits for implementing agreements reached through MAP.

Entry into force

The Protocol will enter into force once both countries have completed their legislative procedures and exchanged diplomatic notes, and will take effect:

• For withholding tax, for amounts paid (Germany) or income derived (UK) on or after 1 January in the year following entry into force.
• In Germany, for other taxes, for fiscal years beginning on or after 1 January in the year following entry into force.
• 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.