Ask a tax advisor on the topic of Double taxation

Withholding tax in third countries on income from commercial operations

January 27, 2014 | 40,00 EUR | answered by Peter Lipp

Hello,

I am German, have been living in Switzerland for 8 years, but still have income from a business in Germany. Therefore, I am subject to limited tax liability in Germany.

The business has establishments in Germany, but also in Czech Republic. The income earned in Czech Republic is subject to withholding tax in Czech Republic.

The following income data should serve as an example:
=============================================
Total income from business: 100,000 euros
Of which earned in Czech Republic: 10,000 euros
Withholding tax paid in Czech Republic: 500 euros (=5%)

I have never provided information on this in my tax return, but have always relied on the tax office's entries "ex officio". These entries have always matched the information provided by the company's auditor.

In all previous years, the tax office has always set an income of 100,000 euros and then credited the foreign withholding tax according to §34c Income Tax Act. Now this credit is suddenly no longer accepted, as a credit is only permissible for income from domestic establishments with limited tax liability (§50, Abs.3).

If that is indeed the case, then shouldn't only the portion earned from domestic establishments (here 90,000 euros) be considered as income in return? Otherwise, the income from Czech Republic would be subject to double taxation in both Germany and Czech Republic.

Thank you for any advice on this.

Peter Lipp

Dear advisee,
basically, § 34 c EStG only applies to taxes from countries with which no double taxation agreement exists. However, there has been a DTA with the Czech Republic since 1980. According to Article 7 of this DTA, the taxation of business profits is carried out where the permanent establishment is located. The same result can be reached through § 50 III ESTG. Since the taxation of income in Czech Republic corresponds to German income tax, the taxation can be carried out there. Therefore, you only need to declare the 90,000 € in Germany. For individuals with limited tax liability, these earnings are also not subject to the progression clause, cf. § 32b I sentence 1 in conjunction with § 50 Ii sentence 2 no. 4 EStG.