Methods of Eliminating Double Taxation
Публикувано на: 13 Фев 2013, 19:52Methods of Eliminating Double Taxation According to the Agreement between Republic of Bulgaria and Federal Republic of Germany from 25.01.2010
Published in magazine ‘Savremenno pravo’, issue No.4/2012
Also available at http://www.sibi.bg/display.php?page=cat ... 2&cont=282
The rapid development of the socio-economic relations in the world in the last decades creates the necessity of revising the meaning of many of the law institutes. Assuredly, the market globalization influences the re-thinking of plenty of the principles of the ‘national states’ ( as the term is defined by Montesquieu), and specially, the state sovereignty.
Liberalization of trade and intensifying the movement of capitals, goods, services and people is today a fact that should be stimulated but not suppressed. This explains why the states change their opinion and begin to realize that the partial restriction of their national sovereignty not only doesn’t menace them, but even gives them a chance for development and economic prosperity.
But till they get aware that they belong to a new reality, many countries continue imposing their sovereignty, especially the fiscal one, to a limitless number of people.
That’s how, if two states, the economic subjects of which have long-lasting trade relations, impose the both fiscal regimes, the subjects will be harmed, because they will be taxed twice for one and the same, unlike the ‘local’ subjects who will be responsible for the tax obligation only once.1
That is the formal reason to search new and more effective methods of minimizing or totally eliminating the effects of the double taxation.
In the International Tax Law Theory are clarified two main modes for avoiding double taxation – as the sates apply one-sided measures of ‘softening’/avoiding the repeating tax or by creating agreements to regulate the field.2
In Bulgaria both methods are used.
There is a plenty of norms in the inner legislation, which should delete the obstacles, provoked by the tax regimes duplication. Such are the norms in the material tax laws – Law on Corporate Income Tax ( Закон за корпоративното подоходно облагане ), Law on Income Tax of Individuals ( Закон за данъка върху доходите на физическите лица ), as well as the procedure law - Tax-Insurance Procedure Code (Данъчно-осигурителен процесуален кодекс), where the avoiding double taxation procedures are presented.
1 Sasho Penov – Tax Law, Special part – Lectures, 2011, page 16
2 Sasho Penov – Tax Law, Special part – Lectures, 2011, page 16, 17
But we shouldn’t concentrate only on the internal norms, as the practice has proven, that exactly in Bulgaria the double-agreements for avoiding double taxation are prevailing.
Our state has concluded more than 50 contracts on this issue, among them one of the most important ones is the Agreement Between Republic of Bulgaria and Federal republic of Germany.
It is of an outstanding importance first, because both countries are member- states of the European Union and second, because Germany is the second most populated with Bulgarian emigrants European country ( the first is Spain), and not last, because many German companies operate independently or through subsidiaries on the Bulgarian market.
The massive changes in the German Tax legislation in the last decade, the economic changes, that took place in Bulgaria the last 20 years, and also –our accession to the European Union in 2007, made it necessary a new agreement to be signed in 2010 ( revising the 1988 Agreement).
As every double agreement, the Agreement between Germany and Bulgaria seeks to maximally precise and detailed to define its personal, territorial and object field, in a way to fix the fiscal sovereign of the negotiating states.
In Article 1 of the Agreement is indicated to which individuals it is applied – ‘ to individuals, that are local to one or to the both negotiating states3.
In Article 4 a ‘local person’ is defined (which is quite identical with the term in the internal law - Law on Corporate Income Tax ( Закон за корпоративното подоходно облагане ), Article 2, Part 1, 1 and in Law on Income Tax of Individuals ( Закон за данъка върху доходите на физическите лица ), Article 4, Part 1. A ‘local person to one of the negotiating states is every person , who has to be taxed according to the fiscal laws of that state because of his/its residence, domicile, place of incorporation, place of management or every other similar criterion..’.
To the natural persons, the criteria, defining them as local are listed in descending order, i.e. from the most typical to the least likely , namely:
1./ According to the state where his dwelling place is situated
2./ According to the state where his ‘center of vital interests’ is situated ( with which he has closer social and economic relations).
3./ State where he resides
4./ State of his citizenship ( According to Law on Income Tax of Individuals ( Закон за данъка върху доходите на физическите лица ) citizenship is not a criterion for defining a person as a ‘local’.
3 Ivan Stoyanov – Tax Law – Basic Part. Tax Procedure – 2008, page 91
5./ By common agreement between Germany and Bulgaria which person will be considered local, if the other criteria of the Agreement can’t be applied
To the companies, the criteria are the following - in Article 4, Part 1 ‘according its place of incorporation’; in Article 5, ‘according to the place of management’.
The 2010 Agreement pays special attention to the last criterion, because in Article 5 not only a definition of the term is given, but also the places of business are listed – branch, office, factory, etc.
It’s interesting to mention that despite the place of management is separately presented in Article 4, in Article 5 it is again midst the enumerated places of business activity, but this time it’s not given an advantage to the others.
Probably that shows that not the formal criteria( seat, place of incorporation) are vital in the field of double taxation, but the pure economic ones ( place of business), may be , so it is proved again that the major sign of the tax relation is its pecuniary character.
Unlike the complications that appear when defining the group of the individuals, when determining the territorial scope are used the International Public Law standards : territory of the state, its continental shelf, the board of a ship or plane and so on.
The subjects, due to taxation According to the 2010 Agreement are the income of wages, real estate income, interest, dividends and others, i.e. objects taxed with the following national taxes : In Germany - Income Tax ( Einkommensteuer), Corporative Tax (Korperschaftsteuer), Trade Tax (Gewerbsteuer) and Property Tax (Vermorgensteuer); And in Bugaria - Corporate Income Tax (Данък за корпоративното подоходно облагане ), Income Tax of Individuals (Данък върху доходите на физическите лица ),Property Tax (Данък върху недвижимото имущество).
The goal set by the negotiating states by signing the 2010 Agreement is obvious. The Agreement aims to cover the maximum number of direct taxes, something that will really have a sensible effect on the limitation of the double taxation.
Before we proceed with the analysis of Chapter 5 of the Agreement ‘Methods for eliminating double taxation’ we should first investigate the mechanism of the nascency of the double taxation.
Both in Bulgaria and in Germany are known the principle of universal taxation and also taxation ‘at the source’.
Principle of the universal taxation4 is taxing all the citizens of a certain state, all the individuals residing or with a domicile in it, as well as all the companies with a seat or with a place of management on its territory, whether the source of the property is in this country.
The other principle – the Principle of the Limited Tax Obligation ( Principle of the Source) – the income is taxed according to its place of origin, and real estate – according to its location.
4 Sasho Penov, Legal Regime of the Avoiding Double Taxation Agreements, Lectures, pages 4,5
As the both principles are used in Bulgaria and in Germany, it is quite probable that the same income will be taxed twice – income from the same source, received from the same person.
That is exactly the issue to be solved with the 2010 Agreement.
Methods of avoiding international double taxation are several.
It is possible that the tax base gets limited – for instance, the income of wages has to be taxed only in the state, where the work was laid and as wages are only a part of an individual’s income, all the income, but the wages, could be taxed twice- i.e. there is a smaller tax base.
Other way for fairer taxation is by reducing the tax rate, of, for instance, the dividends.
In many cases the states totally draw back their fiscal sovereignty for some of the taxes – for instance, for the gains of transfer of property5.
In the 2010 Agreement between Republic of Bulgaria and Federal Republic of Germany the three principles take place.
In Article 22, Part 1, letter ‘a’ is pointed, that every income element, deriving from Bulgaria, and every element of property, situated in Bulgaria, which, in accordance with the Agreement is taxed in Bulgaria, is freed of the tax base of the German tax. There is an example given about dividends of a company, local for Germany, received by a company, local for Bulgaria, as the German possesses 10% of it.
But the method of the tax credit has wider application6.
In Germany the Bulgarian tax, paid accordingly to the Bulgarian legislation is acknowledged as a credit for the German tax for the dividends income ( excluding the dividends not subdue to taxes);interest; royalties; the gain of a local to one of the states person from transferring shares to a company, local for the other negotiating state; the wages income; directors’ fees; the income of performing artists and athletes.
Using this method, all the income is taxed, as the taxes paid in the other negotiating country are written off.7
The same method is used when the object is real estate or gain of transferring personalty and real estate, being part of the assets of a business place ( Article 13, Part 3 of the Agreement).
And as in Germany there is progressive income taxation of individuals, as the rate varies, according to the age, profession, the marital status of the person, although accepting some of the income as taxes –free, Germany has them in mind when defining the income tax rate.
So that the rights of the both states are secured, even in non-listed in the Agreement cases, it is written, that if there is ambiguity or a conflict between Bulgaria and Germany how should income or property be defined/counted , the principle of avoiding double taxation will be
5 Ivan Stoyanov, Tax Law, Basic Part. Tax procedure, page 93
6Sasho Penov, Legal Regime of the Avoiding Double Taxation Agreements, Lectures, pages 7,8
7 There again
used for the income, for which a letter is sent that will be counted for tax credit the year ,following the year when all the legislative requirements are covered, according to the internal German law.
Method for remission of taxes in Bulgaria differs from the German.
If in Germany an effectively taxed income is remised, it means Bulgaria can tax-free income and property, that are still not taxed in Germany, but ‘could be taxed’, in accordance to the Agreement.
In this case Bulgaria will limit the execution of the universal principle of taxing locals, but will empower the principle of taxation at source, like this ‘submitting’ part of its sovereignty to Germany.
The other method with which Bulgaria tries to eliminate the double taxation is the Method of Coupled Deduction or the Method of the Typical Credit8
It prescripts that the income tax of the local for Bulgaria person will be reduced with the tax, paid in Germany, but the tax can’t be bigger than the Bulgarian , i.e. it is not possible that money is paid back in cases the German tax rate is higher than the Bulgarian – for example, Corporative Tax – in Germany the rate is 15%, in Bulgaria – 10%, which means the maximal remised amount in Bulgaria will be 10%.
The credit method is used when the tax object is income of dividends, interest, shares, royalties.
Because of the fact that the taxes, presented in the Agreement are now proportionate, not progressive ( as the Income Tax in Germany is), in Bulgaria the tax remised income and property cannot have an effect on the tax measure.
But besides this, Bulgaria can have in mind the remised income when defining the tax of the other income. Because the tax depends on the relation between the tax base and the tax rate, and the rate is constant, both for the Corporate Income Tax and the Income Tax of Individuals (10%), it means In Bulgaria could be changed the tax base of the other taxes, in case of tax-freed income, deriving from Germany.
The Agreement between Federal Republic of Germany and Republic of Bulgaria about avoiding double taxation responds to the necessity of fostering the economic relations between the two states.
The attempt of the negotiating states to create a maximally unified and detailed legislative framework is quite good; attention is paid to the peculiarities of the two fiscal regimes; it’s obvious the countries searched for rapprochement , not confrontation in the tax law field.
The wish of the states to stimulate the development of the socio – economic relations between themselves is evident- they seek to create a good micro and macroeconomic conditions not only for the large companies ,but also for the middle and the small ones.
8 Sasho Penov, Legal Regime of the Avoiding Double Taxation Agreements, Lectures, page 9
The 2010 Agreement between Republic of Bulgaria and Federal republic of Germany will optimize the production , will improve competitiveness, will multiply the gains and will guarantee the Four Freedoms of The EU on a higher level.
SUMMARY:
The Elimination of Double Taxation Agreement, signed on January 25th, 2010, by Republic of Bulgaria and Federal Republic of Germany, is much more successful than the Agreement from 1988 because it invents and promotes new methods of taxation of the residents and companies of the two states. The 2010 Agreement responds to the necessity of exploring new and refined mechanisms of cooperation in International Taxation Law. In 2010 Agreement the term “residents and local companies” is developed, compared to those of the national legal systems; the instrumentality and objects of taxation are defined in details; the rights of the residents and local companies, as well as the fiscal sovereignty of both states, are secured. 2010 Agreement pays special attention to two of the methods of eliminating double taxation – tax exemption and the method of ordinary tax credit- specified according to the needs of the two countries. The basic goal of 2010 treaty between Republic of Bulgaria and Federal Republic of Germany is obvious – to strengthen the economic ties and interoperability on tax issues.
Published in magazine ‘Savremenno pravo’, issue No.4/2012
Also available at http://www.sibi.bg/display.php?page=cat ... 2&cont=282
The rapid development of the socio-economic relations in the world in the last decades creates the necessity of revising the meaning of many of the law institutes. Assuredly, the market globalization influences the re-thinking of plenty of the principles of the ‘national states’ ( as the term is defined by Montesquieu), and specially, the state sovereignty.
Liberalization of trade and intensifying the movement of capitals, goods, services and people is today a fact that should be stimulated but not suppressed. This explains why the states change their opinion and begin to realize that the partial restriction of their national sovereignty not only doesn’t menace them, but even gives them a chance for development and economic prosperity.
But till they get aware that they belong to a new reality, many countries continue imposing their sovereignty, especially the fiscal one, to a limitless number of people.
That’s how, if two states, the economic subjects of which have long-lasting trade relations, impose the both fiscal regimes, the subjects will be harmed, because they will be taxed twice for one and the same, unlike the ‘local’ subjects who will be responsible for the tax obligation only once.1
That is the formal reason to search new and more effective methods of minimizing or totally eliminating the effects of the double taxation.
In the International Tax Law Theory are clarified two main modes for avoiding double taxation – as the sates apply one-sided measures of ‘softening’/avoiding the repeating tax or by creating agreements to regulate the field.2
In Bulgaria both methods are used.
There is a plenty of norms in the inner legislation, which should delete the obstacles, provoked by the tax regimes duplication. Such are the norms in the material tax laws – Law on Corporate Income Tax ( Закон за корпоративното подоходно облагане ), Law on Income Tax of Individuals ( Закон за данъка върху доходите на физическите лица ), as well as the procedure law - Tax-Insurance Procedure Code (Данъчно-осигурителен процесуален кодекс), where the avoiding double taxation procedures are presented.
1 Sasho Penov – Tax Law, Special part – Lectures, 2011, page 16
2 Sasho Penov – Tax Law, Special part – Lectures, 2011, page 16, 17
But we shouldn’t concentrate only on the internal norms, as the practice has proven, that exactly in Bulgaria the double-agreements for avoiding double taxation are prevailing.
Our state has concluded more than 50 contracts on this issue, among them one of the most important ones is the Agreement Between Republic of Bulgaria and Federal republic of Germany.
It is of an outstanding importance first, because both countries are member- states of the European Union and second, because Germany is the second most populated with Bulgarian emigrants European country ( the first is Spain), and not last, because many German companies operate independently or through subsidiaries on the Bulgarian market.
The massive changes in the German Tax legislation in the last decade, the economic changes, that took place in Bulgaria the last 20 years, and also –our accession to the European Union in 2007, made it necessary a new agreement to be signed in 2010 ( revising the 1988 Agreement).
As every double agreement, the Agreement between Germany and Bulgaria seeks to maximally precise and detailed to define its personal, territorial and object field, in a way to fix the fiscal sovereign of the negotiating states.
In Article 1 of the Agreement is indicated to which individuals it is applied – ‘ to individuals, that are local to one or to the both negotiating states3.
In Article 4 a ‘local person’ is defined (which is quite identical with the term in the internal law - Law on Corporate Income Tax ( Закон за корпоративното подоходно облагане ), Article 2, Part 1, 1 and in Law on Income Tax of Individuals ( Закон за данъка върху доходите на физическите лица ), Article 4, Part 1. A ‘local person to one of the negotiating states is every person , who has to be taxed according to the fiscal laws of that state because of his/its residence, domicile, place of incorporation, place of management or every other similar criterion..’.
To the natural persons, the criteria, defining them as local are listed in descending order, i.e. from the most typical to the least likely , namely:
1./ According to the state where his dwelling place is situated
2./ According to the state where his ‘center of vital interests’ is situated ( with which he has closer social and economic relations).
3./ State where he resides
4./ State of his citizenship ( According to Law on Income Tax of Individuals ( Закон за данъка върху доходите на физическите лица ) citizenship is not a criterion for defining a person as a ‘local’.
3 Ivan Stoyanov – Tax Law – Basic Part. Tax Procedure – 2008, page 91
5./ By common agreement between Germany and Bulgaria which person will be considered local, if the other criteria of the Agreement can’t be applied
To the companies, the criteria are the following - in Article 4, Part 1 ‘according its place of incorporation’; in Article 5, ‘according to the place of management’.
The 2010 Agreement pays special attention to the last criterion, because in Article 5 not only a definition of the term is given, but also the places of business are listed – branch, office, factory, etc.
It’s interesting to mention that despite the place of management is separately presented in Article 4, in Article 5 it is again midst the enumerated places of business activity, but this time it’s not given an advantage to the others.
Probably that shows that not the formal criteria( seat, place of incorporation) are vital in the field of double taxation, but the pure economic ones ( place of business), may be , so it is proved again that the major sign of the tax relation is its pecuniary character.
Unlike the complications that appear when defining the group of the individuals, when determining the territorial scope are used the International Public Law standards : territory of the state, its continental shelf, the board of a ship or plane and so on.
The subjects, due to taxation According to the 2010 Agreement are the income of wages, real estate income, interest, dividends and others, i.e. objects taxed with the following national taxes : In Germany - Income Tax ( Einkommensteuer), Corporative Tax (Korperschaftsteuer), Trade Tax (Gewerbsteuer) and Property Tax (Vermorgensteuer); And in Bugaria - Corporate Income Tax (Данък за корпоративното подоходно облагане ), Income Tax of Individuals (Данък върху доходите на физическите лица ),Property Tax (Данък върху недвижимото имущество).
The goal set by the negotiating states by signing the 2010 Agreement is obvious. The Agreement aims to cover the maximum number of direct taxes, something that will really have a sensible effect on the limitation of the double taxation.
Before we proceed with the analysis of Chapter 5 of the Agreement ‘Methods for eliminating double taxation’ we should first investigate the mechanism of the nascency of the double taxation.
Both in Bulgaria and in Germany are known the principle of universal taxation and also taxation ‘at the source’.
Principle of the universal taxation4 is taxing all the citizens of a certain state, all the individuals residing or with a domicile in it, as well as all the companies with a seat or with a place of management on its territory, whether the source of the property is in this country.
The other principle – the Principle of the Limited Tax Obligation ( Principle of the Source) – the income is taxed according to its place of origin, and real estate – according to its location.
4 Sasho Penov, Legal Regime of the Avoiding Double Taxation Agreements, Lectures, pages 4,5
As the both principles are used in Bulgaria and in Germany, it is quite probable that the same income will be taxed twice – income from the same source, received from the same person.
That is exactly the issue to be solved with the 2010 Agreement.
Methods of avoiding international double taxation are several.
It is possible that the tax base gets limited – for instance, the income of wages has to be taxed only in the state, where the work was laid and as wages are only a part of an individual’s income, all the income, but the wages, could be taxed twice- i.e. there is a smaller tax base.
Other way for fairer taxation is by reducing the tax rate, of, for instance, the dividends.
In many cases the states totally draw back their fiscal sovereignty for some of the taxes – for instance, for the gains of transfer of property5.
In the 2010 Agreement between Republic of Bulgaria and Federal Republic of Germany the three principles take place.
In Article 22, Part 1, letter ‘a’ is pointed, that every income element, deriving from Bulgaria, and every element of property, situated in Bulgaria, which, in accordance with the Agreement is taxed in Bulgaria, is freed of the tax base of the German tax. There is an example given about dividends of a company, local for Germany, received by a company, local for Bulgaria, as the German possesses 10% of it.
But the method of the tax credit has wider application6.
In Germany the Bulgarian tax, paid accordingly to the Bulgarian legislation is acknowledged as a credit for the German tax for the dividends income ( excluding the dividends not subdue to taxes);interest; royalties; the gain of a local to one of the states person from transferring shares to a company, local for the other negotiating state; the wages income; directors’ fees; the income of performing artists and athletes.
Using this method, all the income is taxed, as the taxes paid in the other negotiating country are written off.7
The same method is used when the object is real estate or gain of transferring personalty and real estate, being part of the assets of a business place ( Article 13, Part 3 of the Agreement).
And as in Germany there is progressive income taxation of individuals, as the rate varies, according to the age, profession, the marital status of the person, although accepting some of the income as taxes –free, Germany has them in mind when defining the income tax rate.
So that the rights of the both states are secured, even in non-listed in the Agreement cases, it is written, that if there is ambiguity or a conflict between Bulgaria and Germany how should income or property be defined/counted , the principle of avoiding double taxation will be
5 Ivan Stoyanov, Tax Law, Basic Part. Tax procedure, page 93
6Sasho Penov, Legal Regime of the Avoiding Double Taxation Agreements, Lectures, pages 7,8
7 There again
used for the income, for which a letter is sent that will be counted for tax credit the year ,following the year when all the legislative requirements are covered, according to the internal German law.
Method for remission of taxes in Bulgaria differs from the German.
If in Germany an effectively taxed income is remised, it means Bulgaria can tax-free income and property, that are still not taxed in Germany, but ‘could be taxed’, in accordance to the Agreement.
In this case Bulgaria will limit the execution of the universal principle of taxing locals, but will empower the principle of taxation at source, like this ‘submitting’ part of its sovereignty to Germany.
The other method with which Bulgaria tries to eliminate the double taxation is the Method of Coupled Deduction or the Method of the Typical Credit8
It prescripts that the income tax of the local for Bulgaria person will be reduced with the tax, paid in Germany, but the tax can’t be bigger than the Bulgarian , i.e. it is not possible that money is paid back in cases the German tax rate is higher than the Bulgarian – for example, Corporative Tax – in Germany the rate is 15%, in Bulgaria – 10%, which means the maximal remised amount in Bulgaria will be 10%.
The credit method is used when the tax object is income of dividends, interest, shares, royalties.
Because of the fact that the taxes, presented in the Agreement are now proportionate, not progressive ( as the Income Tax in Germany is), in Bulgaria the tax remised income and property cannot have an effect on the tax measure.
But besides this, Bulgaria can have in mind the remised income when defining the tax of the other income. Because the tax depends on the relation between the tax base and the tax rate, and the rate is constant, both for the Corporate Income Tax and the Income Tax of Individuals (10%), it means In Bulgaria could be changed the tax base of the other taxes, in case of tax-freed income, deriving from Germany.
The Agreement between Federal Republic of Germany and Republic of Bulgaria about avoiding double taxation responds to the necessity of fostering the economic relations between the two states.
The attempt of the negotiating states to create a maximally unified and detailed legislative framework is quite good; attention is paid to the peculiarities of the two fiscal regimes; it’s obvious the countries searched for rapprochement , not confrontation in the tax law field.
The wish of the states to stimulate the development of the socio – economic relations between themselves is evident- they seek to create a good micro and macroeconomic conditions not only for the large companies ,but also for the middle and the small ones.
8 Sasho Penov, Legal Regime of the Avoiding Double Taxation Agreements, Lectures, page 9
The 2010 Agreement between Republic of Bulgaria and Federal republic of Germany will optimize the production , will improve competitiveness, will multiply the gains and will guarantee the Four Freedoms of The EU on a higher level.
SUMMARY:
The Elimination of Double Taxation Agreement, signed on January 25th, 2010, by Republic of Bulgaria and Federal Republic of Germany, is much more successful than the Agreement from 1988 because it invents and promotes new methods of taxation of the residents and companies of the two states. The 2010 Agreement responds to the necessity of exploring new and refined mechanisms of cooperation in International Taxation Law. In 2010 Agreement the term “residents and local companies” is developed, compared to those of the national legal systems; the instrumentality and objects of taxation are defined in details; the rights of the residents and local companies, as well as the fiscal sovereignty of both states, are secured. 2010 Agreement pays special attention to two of the methods of eliminating double taxation – tax exemption and the method of ordinary tax credit- specified according to the needs of the two countries. The basic goal of 2010 treaty between Republic of Bulgaria and Federal Republic of Germany is obvious – to strengthen the economic ties and interoperability on tax issues.