The Supreme Tax Court decided that the “switch-over" provision in the respective tax treaties with Russia and Romania, which changes the exemption method to the credit method, was to be applied by observing the activity requirements set in Section 8 (1) of the German Foreign Tax Act.
According to Art. 23 (2) c of the double tax agreement (DTA) with Russia – and notwithstanding the provisions of letter a - income within the meaning of Art. 7 DTA Russia is only exempt from German tax if the person resident in Germany proves that the permanent establishment (PE) derived its gross income in the relevant financial year exclusively or almost exclusively from activities covered by Section 8 (1( Nos. 1 to 6 Foreign Tax Act (FTA). Article 23 (2) c of the DTA with Romania contains a comparable provision.
Section 20 FTA contains rules on the application of treaties for the avoidance of double taxation. According to Section 20 (2) sentence 1 FTA, income which accrues to a foreign PE of a taxpayer with unlimited liability that, disregarding Sec. 8 (2), would have been taxable as intermediary income had the PE been a foreign company, double taxation is to be avoided to that extent, not by exemption, but by crediting the foreign taxes charged on that income. As an exception, Sec. 20 (2) sentence 2 FTA states that this does not apply to income of the foreign PE that would have been taxable as so-called intermediary income under Sec. 8 (1) no. 5 letter a FTA.
