Australia and Germany have entered into a new double taxation agreement (DTA). Both states have ratified the agreement signed already in 2015. The new DTA is effective in Germany since 7 December 2016. It replaces the DTA of 1972. Its rules will apply from 1 January 2017 on. The DTA is meant to strengthen trade and investment between both economies by providing greater taxation certainty. The DTA also applies the OECD/G20 Base Erosion and Profit Shifting (BEPS) principles to help countering tax avoidance measures of multinational companies.
The new DTA will affect investors and businesses being engaged in cross-border transactions. It will also impact multi-national businesses with operations or assets in Australia and Germany. In the first place, the new DTA reduces the withholding tax imposed on royalties, certain kinds of interest and dividends by the country of origin. The new maximum rates are as follows:
- Interest: 10%. – Besides, the DTA provides for a new exemption of interest derived by a government, central bank or financial institution that is not related to the payer
- Royalties: 5% (reduced from 10%)
- 0% for intercompany group dividends paid to publicly listed companies, or some unlisted companies, that hold at least 80% voting stock in the in the 12 months before the dividend is declared (This rate is reduced from priorly 15%);
- 5% for intercorporate dividends paid to companies that hold at least 10% of the voting stock in the paying company throughout a six-month period (reduced from 15%); and
- 15% for all other dividends.
Moreover, with the new DTA the concept of tax residency is revised by the new DTA: The DTA provides for several additional activities which may constitute a permanent establishment (PE), provided they are carried on for certain minimum period of time and that they are not eligible for a specific exemption, such as operating “substantial equipment”, natural resource exploration or exploitation, and supervisory or consultancy activities in connection with a building site or installation or construction project.
Also the minimum time period for operating a building site or construction or installation project is increased from six to nine months. Also the circumstances under which the employment of an agent constitutes a permanent establishment have been increased.This now includes agents who “habitually play the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise”. On the other side, assembly projects are no longer included in the definition of a permanent establishment.
Apart from the aforesaid changes, the new DTA entails many other changes and new regulations. All businesses and investors with cross-border activities should seek advice on how their profits are likely to be impacted. With regard to businesses operating in mining and natural resources, construction or manufacturing which may be particularly affected by changes to the “permanent establishment” definition, we highly recommend to consult your tax advisor on time to check your cross-border tax status from 2017 onwards.
Counselhouse can help you to examine the impact of the new DTA regulations on your business activities and, as the case may be, will also provide legal advice with regard to potential corporate and legal arrangements to adjust your tax status.