Double taxation

Double taxation: explanation and examples

Double taxation (multiple taxation) is an important concept in tax law that can occur in different contexts. There are two main types of understanding:

1. double taxation at company and shareholder level

Definition: The same income is taxed twice - once at company level and a second time at shareholder level.

Example:

• A GmbH generates a profit of € 100,000.
• This profit is subject to 15% corporation tax (€ 15,000).
• The remaining € 85,000 is distributed to the shareholders as dividends.
• For the shareholders, these dividends are again subject to withholding tax of 25% (€21,250).
• A total of € 36,250 in taxes was therefore paid on the original profit of € 100,000.

2. double taxation in an international context

Definition: This occurs when the same income is taxed in two or more countries, typically due to different tax laws or definitions of tax liability.

Example:

• A German citizen works for one year in the USA and earns 80,000 $ there.
• The USA taxes this income with 30% (24,000 $) due to the source country principle (ETBUS).
• Germany could also claim to tax this income (e.g. with 40% = 32,000 $) on the basis of the world income principle.
• Without countermeasures, the taxpayer would pay a total of 56,000 $ in taxes, which would correspond to an effective tax rate of 70%.

Mechanisms to avoid double taxation

1. Double taxation agreements (DTA):
   • Bilateral agreements between countries
   • Determine which state has the right of taxation in certain cases
   • Example: Germany-USA DTA stipulates that employment income is primarily taxed in the country of employment (USA)
2. Crediting method:
   • Taxes paid abroad can be deducted from the domestic tax liability. Tax liability be credited
   • Example: Of the 32,000 $ taxes in Germany the 24,000 $ paid in the USA could be deducted
3. Exemption method:
   • Certain foreign income is exempt from domestic taxation
   • Example: Germany could do this in the USA completely exempt income earned from German taxation

Double taxation is a complex issue in tax law that encompasses both national and international aspects and can have a significant impact on companies and individuals. The avoidance of double taxation is an important goal of international tax policy in order to enable fair and efficient cross-border economic activities.

FAQ: Multiple taxation and related topics

1. what is meant by a double tax burden?

A double tax burden occurs when the same income or assets are taxed twice or more, either by different countries or at different levels within a country.

2 What forms of multiple taxation are there?

There are two main types:

1. Double taxation at company and shareholder level
2. International multiple tax burden

3. can you give an example of a double burden at company level?

A typical example is the taxation of corporate profits: First, the profit is subject to corporation tax at company level, and when this profit is distributed to the shareholders as a dividend, it is subject to income tax again.

4 How does an international double tax burden arise?

An international double tax burden can arise if a person or company is liable to pay tax in more than one country. This can occur due to different tax principles (e.g. global income principle vs. source country principle) or due to conflicts in the definition of residence or permanent establishment.

5 What are treaties for the avoidance of double taxation?

These agreements are bilateral treaties between two countries that stipulate how certain income is to be taxed in order to avoid multiple taxation. They regulate which country has the right of taxation in which cases.

6 How does the tax credit method work?

With the imputation method, income paid abroad is Taxes on domestic tax liability is taken into account. This prevents a complete double tax burden, but can lead to a residual tax if the domestic tax rate is higher.

7 What is the exemption method?

Under the exemption method, certain foreign income is completely exempt from domestic taxation. This method is often used in Agreement for the avoidance of double taxation and completely prevents a multiple tax burden.

8 What consequences can multiple taxation have?

A multiple tax burden can lead to an excessive tax burden, which can inhibit international business activities, investments and labor mobility. It can also affect the competitiveness of companies and the financial situation of individuals.

9 Who is affected by a double tax liability?

A double tax liability can affect various groups:

• Companies with international business activities
• Employees who work abroad
• Investors with foreign capital investments
• Pensioners who spend their retirement abroad

10. how can you protect yourself from multiple taxation?

To protect yourself from multiple taxation, you should:

• Find out about relevant tax treaties
• Take advantage of tax advice
• Check options for tax credit or exemption
• Plan your tax situation carefully, especially for international activities

11. are there exceptions to treaties for the avoidance of double taxation?

Yes, some countries have no or only limited tax treaties. In addition, certain types of income or special situations may be excluded from such agreements. It is important to check the specific rules of the relevant treaty.

12 How does a double tax liability affect digital business models?

Digital business models pose a particular challenge, as they are often without physical presence can operate in one country. Many countries are working on new tax regulations for the digital economy to prevent tax avoidance and ensure fair taxation.