Anyone operating internationally, holding assets in multiple countries, or earning income in both Germany and the United States will sooner or later encounter the topic of Double taxation in contact. Without international tax agreements, the same income or assets could essentially be taxed in both states. To avoid this and at the same time ensure a fair distribution of taxing rights between the states, many countries conclude so-called Double Taxation Agreement (DTA).

For clients with connections to Germany and the USA, particularly the Double Taxation Agreement on Income Tax as well as the German-American agreements for the avoidance of double taxation in the area of estate, inheritance, and gift taxes a central role.

Especially in international corporate structures, cross-border investments, and international estate planning, these agreements are among the most important legal foundations.

A double taxation agreement is a public international law treaty between two states. Its purpose is to avoid double taxation of the same income or assets while simultaneously determining which state has the respective right to tax.

However, a double taxation agreement does not automatically mean that no taxes need to be paid at all. Rather, the agreement regulates which state is allowed to levy the tax and how the other state prevents double taxation. This is regularly done either through a tax credit or through an exemption from tax according to the respective national regulations.

Beyond that, modern double taxation agreements contain extensive provisions to prevent tax evasion, for mutual assistance between tax authorities, and to prevent abusive utilization.

In practice, double taxation issues arise particularly when residency, assets, or income are spread across multiple countries.

Typical examples include:

• A person residing in Germany earns income from the USA
• a company based in Germany conducts business operations in the United States
• A US company earns income in Germany
• Real estate is located in a different state than the owner's residence
• Investments, participations, or company shares are held across borders
• An estate includes assets in both Germany and the USA.

This is especially true for entrepreneurs, investors, and high-net-worth individuals, where multiple national tax laws often apply simultaneously. It is only through the double taxation agreement that it is determined which state may exercise which taxing right.

Several independent agreements exist between Germany and the United States.

Of particular importance are:

• the Agreement for the Avoidance of Double Taxation on Income and on Capital and on Certain Other Taxes, which specifically governs income from self-employment and employment, business profits, dividends, interest, royalties, and capital gains,
• as well as the Agreement for the avoidance of double taxation on inheritances, gifts, and estates, which is of considerable importance, especially for international estate planning and asset transfers.

Which agreement applies in a specific case depends on the type of tax involved.

The Double Taxation Agreement primarily regulates the taxation of cross-border income.

This includes, for example:

• Corporate profits
• Income from employment
• Dividends
• Interest
• Royalties
• Income from immovable property
• Capital gains
• Supervisory board compensation
• Interest rates

The agreement assigns the right to tax either exclusively to one state or distributes it between both states, depending on the type of income. In many cases, the source state initially levies withholding tax, while the state of residence takes this tax into account in accordance with its national tax law.

How this relief is granted in detail depends on both the specific article of the double taxation agreement and the national tax laws. Therefore, a blanket statement that foreign taxes are always fully credited cannot be made.

Hardly any regulation in international tax law is as frequently misunderstood as the so-called 183-day rule.

Contrary to a widespread assumption, a stay of less than 183 days in the USA by no means automatically means that no income tax is due there.

The 183-day rule is only found in the double taxation agreement for certain income from dependent work and only applies if other conditions are met at the same time.

Among other things, it depends on who is the employer in the tax law sense, who economically bears the remuneration, whether a permanent establishment exists in the country of activity, and what specific activity is performed.

This is to be distinguished from the Substantial Presence Test U.S. tax law. This is used to determine tax residency under U.S. law and uses its own calculation formula, which takes into account stays over a period of three years.

Does this lead to dual tax residency, then the so-called Tie-Breaker Rules of the double taxation treaty. They refer, among other things, to the center of vital interests, habitual residence, and, where applicable, nationality.

For high-net-worth individuals, the German-American inheritance tax treaty often has significant practical importance.

This particularly concerns estates of individuals who were domiciled in Germany, the USA, or both countries at the time of their death, as well as cross-border gifts.

The agreement specifically regulates which state has the right to tax individual assets, how double taxation is avoided, what crediting options exist, and special provisions for trusts and estate assets.

Especially with real estate, business interests, or international family assets, early estate planning is often advisable. Without coordinated planning, significant additional tax burdens can arise.

In addition to actual taxation, double taxation agreements also influence the structuring of internationally operating companies.

Of particular importance are, among others, questions of

• Taxation of Permanent Establishments
• Intracompany financing
• License Structures
• Dividend Payouts
• Transfer pricing
• Withholding tax relief
• Holding structures

However, tax optimization should never be undertaken in isolation. Every international structure must be legally, fiscally, and economically viable and comply with both German and U.S. compliance requirements.

While the United States has concluded double taxation treaties with numerous countries, treaties with various other countries do not exist to this day.

This can have significant tax implications, especially with investments in South America or certain offshore jurisdictions. If a double taxation agreement (DTA) is missing, domestic relief measures can help to some extent, but comprehensive avoidance of double taxation is often more difficult.

International investments should therefore be subject to tax review before their implementation.

Double taxation agreements are among the most important instruments of international tax law. Especially in the relationship between Germany and the United States, the regulations often interact and require careful analysis of both German and U.S. tax law. This applies in particular to international corporate structures, cross-border investments, real estate assets, as well as estate and asset planning.

Urban Thier & Federer has been advising companies, entrepreneurs, and private individuals on complex German-American matters for many years. Together with specialized tax advisors, we develop legally and tax-coordinated solutions for international asset and corporate structures.