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PKF International

Internationally Mobile Employees

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PKF International

Recently published: Agreement between Germany and Switzerland not binding for taxation of severance payments

13 Jan 2016

In 2010, the tax authorities of Germany and Switzerland concluded an agreement on the taxation of severance payments. The agreement was based on Article 26 par. 3 of the Double Taxation Treaty between the Germany and Switzerland, and had the intention to complement the rules in Article 15 of the Double Taxation Treaty.

With respect to severance payments which are paid as a compensation for the loss of employment, the agreement provides that the taxation right is allocated to the state where the work has actually been carried out. In contrast to that, according to the wording of Article 15 of the Double Taxation Treaty, the taxation right would be allocated to the state where the individual is resident at the point in time when the severance payment is actually paid to him.

In the underlying court case, the individual had changed his residence from Germany to Switzerland before the payment. Based on the agreement, Germany claimed the right to tax the severance payment as the state in which the work has actually been carried out. The Federal Tax Court decided in June 2015 however (although the decision has been published recently) that the agreement between Germany and Switzerland has not been properly enacted and was not therefore binding for German tax courts. Consequently, the taxation right of the severance payment has to be determined only based on Article 15 of the Double Taxation Treaty, and not based on the (additional) agreement.

PKF Comment

The decision of the Federal Tax Court does not only affect the additional agreement with Switzerland but extends to similar agreements concluded with other countries on the taxation of severance payments (Belgium, UK, Luxemburg, The Netherlands and Austria).

The German tax authorities however are not likely to apply the judgment of the Federal Tax Court generally i.e. to all "open" cases and cases coming into existence in the future. Instead, it is expected that they will apply the judgment in isolation and only to the particular case in question.

This consequence of this means that it will unfortunately be necessary to bring comparable cases before a tax court in order to challenge the position being adopted by the German tax authorities in giving precedence to the additional agreement concluded with the tax authorities of another state which overrules, and is in conflict with, the respective Double Taxation Treaty. For further information or advice concerning this, or any other German tax matter, please contact Thorsten Haake at [email protected]


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