U.S. income tax treaty with Germany

Treaty documents and protocols

The 1989 convention is the base text, and the 2006 Protocol amends it, so the two have to be read together. The IRS lists the convention and a 1989 technical explanation, plus the Protocol and a technical explanation dated 2007. The Protocol changed the dividend article, which now allows a 0 percent source rate for qualifying parent companies that the 1989 text did not. IRS Table 3 shows the convention effective January 1, 1990 and the Protocol January 1, 2008.^[1][4][6]

Convention article structure

The convention has 33 numbered articles, followed by a Protocol and related documents. Its articles cover personal scope, taxes, definitions, residence, permanent establishment and income categories, then administrative provisions and treaty operation.^[2]

Dividends, interest and royalties

Article 10 allows dividends paid by a company resident in one country to a resident of the other to be taxed in that other country. The source country may also tax them under its laws, subject to a ceiling of 5 percent of gross dividends when the beneficial owner is a company holding directly at least 10 percent of the payer's voting shares, and 15 percent in other cases. As amended by the 2006 protocol, dividends are not taxed at source at all when the beneficial owner is a company that has held at least 80 percent of the voting power for 12 months and meets the limitation on benefits conditions. Special rules apply to specified investment companies and trusts, and the 5 percent company rate does not apply to dividends paid by a U.S. real estate investment trust.^[2][4]

The convention defines interest as income from debt claims and related returns treated as interest under the relevant country's tax law. Article 11 generally assigns taxation of interest that is derived and beneficially owned by a resident of one country only to that country. This rule has an exception when the debt claim is connected to a permanent establishment or fixed base in the other country. A special relationship between payer and beneficial owner also limits the article's treatment to the amount that would have been agreed without that relationship.^[2]

Article 12 defines royalties to include payments for use of, or rights to use, listed intellectual property and information about industrial, commercial or scientific experience. It also includes certain gains from transferring such rights when the gains depend on productivity, use or further transfer. Royalties derived and beneficially owned by a resident are generally taxable only in that person's country of residence. The article's rule gives way when the right or property is connected with a permanent establishment or fixed base in the other country, and a special relationship can limit treatment to an arm's length amount.^[2]

Residence under the convention

Article 4 defines a resident of a country by liability to tax there because of domicile, residence, place of management, place of incorporation or a similar criterion. It excludes a person liable to tax there only on source income or local capital. For partnership, estate or trust income, the definition applies only to the extent that income is taxed as the income of a resident.^[2]

When an individual is a resident of both countries under that definition, the convention applies a sequence of tie breakers. The person is assigned first to the country where a permanent home is available; if homes are available in both, the closer personal and economic relations control. If that cannot resolve residence, habitual abode is examined, followed by nationality. If the individual is a national of both countries or neither, the competent authorities settle residence by mutual agreement.^[2]

Exchange of information

Article 26 calls for the countries' competent authorities to exchange information needed to administer the convention and domestic tax laws covered by it, when taxation under those laws is consistent with the convention. This exchange is not limited by Article 1's personal scope. Information received is handled under the receiving country's domestic rules and may be disclosed only to authorities or persons involved in specified tax functions, subject to the article's terms.^[2]

Limitation on benefits

The convention includes Article 28, titled Limitation on Benefits. It addresses which residents deriving income from the other country qualify for all convention benefits. The listed categories include individuals, a contracting state or its local authorities, persons conducting certain active businesses, companies traded on a recognized exchange, certain ownership and income conditions, and qualifying nonprofit organizations. The competent authority in the country where income arises may grant benefits to a person who does not qualify under the listed categories.^[2]

Saving clause and U.S. citizens

Paragraph 1(a) of the Protocol says that, with listed exceptions, the United States may tax its residents as determined under Article 4 and its citizens as if the convention had not taken effect. The clause reserves U.S. taxing authority under the Internal Revenue Code despite conflicting convention provisions. Specified treaty provisions remain applicable to U.S. citizens and residents under the clause's exceptions.^[2][3]

Questions and answers

Related resources

Related glossary terms

• Limitation on benefits: A limitation on benefits article sets conditions for entities in a treaty country to qualify for certain treaty benefits under the applicable U.S. tax treaty.
• Treaty rate table: A treaty rate table summarizes income categories and tax rates or exemptions under U.S. income tax treaties. The IRS explains the tables' scope and limits.
• Tax residence: Tax residence describes a person's status in a country for tax purposes. Treaty texts address how it affects income items and applicable treaty requirements.

Related articles and guides

• U.S. income tax treaty with Georgia: For Georgia the IRS lists the 1973 convention with the Soviet Union, which exempts only specified items such as certain royalties and trade-financing interest.
• U.S. income tax treaty with Luxembourg: The current U.S. treaty with Luxembourg is the 1996 convention, amended by a 2009 Protocol on information exchange. The IRS-linked 1962 text is superseded.

Related pages

• Tax treaties: All treaty partners listed by the IRS.
• Treaty documents lookup: Find IRS-listed treaty documents by country.