September 7, 2021
German Ministry of Finance issues guidance on dispute resolutions for income and property taxes
On 27 August 2021, the German Ministry of Finance (BMF) issued a letter titled “Leaflet regarding dispute resolutions in the field of income and property taxes” on 27 August 2021 (the Letter). This follows publication of the Administrative Principles Transfer Pricing on 14 July 2021.1
In the Letter, the BMF comments on dispute settlement procedures under double tax treaties (DTTs), under the European Union (EU) Arbitration Convention and under the EU DTT Dispute Settlement Act (EU-DTT-SBG).2 In addition, general procedural questions regarding the application are clarified for all procedures. In light of increasing legal uncertainties in the application and interpretation in Germany of the arm's-length principle, the Letter is of high practical relevance for taxpayers.
This Alert summarizes the key aspects of the Letter.
The Letter supersedes the BMF letter dated 9 October 2018, Leaflet on international mutual agreement and arbitration proceedings in the field of income and property taxes and contains general information on how dispute settlement procedures are carried out in Germany. In addition, the Letter explains in detail the three possible types of dispute resolution procedures (under DTTs, the EU Arbitration Convention and the EU-DBA-SBG). However, the Letter does not address cases of advance dispute avoidance procedures (e.g., advance pricing agreements), for which a separate BMF letter is expected.
The EU-DTT-SBG represents an alternative to the existing procedures under a DTT or under the EU Arbitration Convention for cases where both involved entities are resident in EU Member States. The details of this alternative are now described in the Letter (including general explanations such as how to initiate and apply for a mutual agreement and arbitration procedure). The EU-DTT-SBG applies to tax years beginning on or after 1 January 2018, though taxpayers may also request to include earlier years. The acceptance of such requests will be decided for each individual case after conferring with the foreign Competent Authority.
The Letter first describes procedural aspects that are generally the same for all three dispute resolution procedures, however, existing regulations and long-standing procedural practice are now more restrictive to a certain extent.
In principle, the application has to be submitted in the German language including a translation in the common working language (generally English) of the countries involved. A taxpayer can submit an application in a common working language (i.e., without a separate German version) with the prior consent of both the German Competent Authorities and responsible local tax office. This is of particular importance for determining the deadlines. Although an application solely filed in a common working language is deemed to have been filed at the time of receipt of the application for purposes of the Mutual Agreement Procedure (MAP) filing deadlines, the other procedural time limits (e.g., administrative notification deadlines which in a worst case could result in missing filing deadlines in the other country) run only from the date when the German Competent Authorities and responsible local tax office subsequently agreed on the acceptance of the common working language (and not at the time of receipt of the application).
Another critical aspect is the position of the BMF that an application is only deemed to be submitted within the deadline if all required documents as defined in the Letter have been submitted by the taxpayer and are available to the German Competent Authority. Instead of limiting the required documents to certain core information in accordance with the German fiscal code for filing an appeal in a timely manner, the BMF is significantly expanding the information requirement. In addition to general standard information such as address, tax number, etc., comprehensive background documentation on the facts and circumstances justifying the application is also required.
The Letter further contains clarifying notes with respect to the relationship between dispute resolution procedures and domestic appeal proceedings. For example, the BMF confirms that it is permissible to conduct domestic appeal proceedings and international dispute resolution proceedings on the same subject matter at the same time. However, in cases where a final judgment of a German court is available, it remains open as to whether the BMF would accept the possibility to conduct a mutual agreement or arbitration procedure with a potentially different outcome.
The BMF also comments in detail on the relationship between MAP and withholding tax refund procedures. In particular, it should be noted that, according to the BMF, the application deadline for a MAP is triggered at the time of the original withholding tax obligation. Given that in many cases decisions on refund applications will only be available after expiration of the application deadlines, taxpayers should consider filing applications as a precautionary measure in order to protect their legal position, i.e., even before a decision on the refund application has been made. Furthermore, the BMF states that for cases where a taxpayer has not complied with the requirements applicable to the refund procedure, the access to a MAP with respect to the withholding tax obligation is denied.
Taxpayers should review the changes with respect to dispute settlement procedures in Germany, such as application deadlines, scope and language of the application, and assess any implications relevant to their dispute resolution strategy.
For additional information with respect to this Alert, please contact the following:
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft
Ernst & Young LLP (United States), EMEIA Transfer Pricing Desk, New York