How the word “only” can make a difference in international taxation

Sometimes – thanks to the tax administration – you are asked to dig again into what you have learned as a tax student on basic rules of international taxation.

Source: KI Gemini

So, what has happened: The tax office argues article 14 (4) of the tax treaty between Cyprus and Germany from 2011, which deals with the taxation of the salary of crews on ships and airlines and which uses the term "shall be taxable only", is overruled by Article 22 which deals with the elimination of double taxation. Hence, the tax office argues Germany has a taxation right. The difference: Article 14 (4) allows only Cyprus to tax the salary (if the place of effective management of the employer and shipping company is situated in Cyprus) while Article 22 allows also Germany to tax and to credit any Cyprus income tax against the German income tax (credit method).

The (overlooked) basic rule: The term "shall be taxable only" in a tax treaty usually precludes the other contracting state from taxing, thus double taxation is avoided by way of tax exemption in other contracting state. In such cases one usually does not need to check Article 23A or 23B of the OECD-MC for the assessment of the elimination of double taxation because the distributive rules of Article 6 to 21 of tax treaties include already the legal consequence (compare the OECD -MC Commentary 2017, Article 23A and B, Sec. 6).

In contrast: Where a distribution rule does not determine the final taxation “may be taxed” one needs to assess the final taxation rights by checking the legal consequence in Article 23A or 23B of the OECD-MC (perfectly summarized also in Vogel/Lehner/Dürrschmidt, OECD-MC, before Article 6, Sec. 4 to 7).

Now, should the German tax administration also share this view? Yes, they should as this conclusion is explicitly stated in the Federal Tax Administration Letter (treatment of salaries in tax treaties) dated 12 Dec 2023, Sec 37.

I admit the word “only” can be easily overlooked, but it can make a big difference in taxation