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TREATISE, VOGEL, A. Regarding Art.

15 (1) and (2)


A. Regarding Art. 15 (1) and (2)

I. MC Commentary

[2] 1. [Principle] Paragraph 1 establishes the general rule as to the taxation of


income from employment (other than pensions), namely, that such income is taxable
in the State where the employment is actually exercised. One consequence of this
would be that a resident of a Contracting State who derived remuneration, in respect
of an employment, from sources in the other State could not be taxed in that other
State in respect of that remuneration merely because the results of this work were
exploited in that other State.

[3] 2. [Special arrangements] The general rule is subject to exception only in the
case of pensions (Article 18) and of remuneration and pensions in respect of
government service (Article 19). Remuneration of members of boards of directors of
companies is the subject of Article 16.

[4] 3. [Exception: Residence Principle] Paragraph 2 contains, however, a


general exception to the rule in paragraph 1. This exception covers all individuals
rendering dependent personal services (sales representatives, construction workers,
engineers, etc.), to the extent that their remuneration does not fall under the
provisions of other Articles, such as those applying to government services or artistes
and sportsmen.

[4a] 4. [183-day rule] The three conditions prescribed in this paragraph must be
satisfied for the remuneration to qualify for the exemption. The first condition is that
the exemption is limited to the 183-day period. It is further stipulated that this time
period may not be exceeded ‘in any twelve month period commencing or ending in
the fiscal year concerned’. This contrasts with the 1963 Draft Convention and the
1977 Model Convention which provided that the 183-day period should not be
exceeded ‘in the fiscal year concerned’, a formulation that created difficulties where
the fiscal years of the Contracting States did not coincide and which opened up
opportunities in the sense that operations were sometimes organised in such a way
that, for example, workers stayed in the State concerned for the last 5 1/2 months of
one year and the first 5 1/2 months of the following year. The present wording of sub-
paragraph 2 a) does away with such opportunities for tax avoidance.

[4b] 5. [Calculation of the 183 days] Although various formulas have been used
by Member countries to calculate the 183-day period, there is only one way which is
consistent with the wording of this paragraph: the ‘days of physical presence’
method. The application of this method is straightforward as the individual is either
present in a country or he is not. The presence could also relatively easily be
documented by the taxpayer when evidence is required by the tax authorities. Under
this method the following days are included in the calculation: part of a day, day of
arrival, day of departure and all other days spent inside the State of activity such as
Saturdays and Sundays, national holidays, holidays before, during and after the
activity, short breaks (training, strikes, lock-out, delays in supplies), days of sickness
(unless they prevent the individual from leaving and he would have otherwise
qualified for the exemption) and death or sickness in the family. However, days spent
in the State of activity in transit in the course of a trip between two points outside
the State of activity should be excluded from the computation. It follows from these
principles that any entire day spent outside the State of activity, whether for
holidays, business trips, or any other reason, should not be taken into account. A day

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during any part of which, however brief, the taxpayer is present in a State counts as
a day of presence in that State for purposes of computing the 183-day period.

[4c] 6. [Deleted on 21 September 1995]

[4d] 7. [Employer] The second condition is that the employer paying the
remuneration must not be a resident of the State in which the employment is
exercised. Some Member countries may, however, consider that it is inappropriate to
extend the exception of paragraph 2 to cases where the employer is not a resident of
the State of residence of the employee, as there might then be administrative
difficulties in determining the employment income of the employee or in enforcing
withholding obligations on the employer. Contracting States that share this view are
free to adopt bilaterally the following alternative wording of subparagraph 2 b):

“ b) the remuneration is paid by, or on behalf of, an employer who is a resident of


the first-mentioned State, and”

7.1 [Permanent establishment] Under the third condition, if the employer has in
the State in which the employment is exercised a permanent establishment (or a
fixed base if he performs professional services or other activities of an independent
character), the exemption is given only on condition that the remuneration is not
borne by a permanent establishment or a fixed base which he has in that State.

8. [International hiring-out of labour] Paragraph 2 has given rise to numerous


cases of abuse through adoption of the practice known as ‘international hiring-out of
labour’. In this system, a local employer wishing to employ foreign labour for one or
more periods of less than 183 days recruits through an intermediary established
abroad who purports to be the employer and hires the labour out to the employer.
The worker thus fulfils prima facie the three conditions laid down by paragraph 2 and
may claim exemption from taxation in the country where he is temporarily working.
To prevent such abuse, in situations of this type, the term ‘employer’ should be
interpreted in the context of paragraph 2. In this respect, it should be noted that the
term ‘employer’ is not defined in the Convention but it is understood that the
employer is the person having rights on the work produced and bearing the relative
responsibility and risks. In cases of international hiring-out of labour, these functions
are to a large extent exercised by the user. In this context, substance should prevail
over form, i.e. each case should be examined to see whether the functions of
employer were exercised mainly by the intermediary or by the user. It is therefore up
to the Contracting States to agree on the situations in which the intermediary does
not fulfil the conditions required for him to be considered as the employer within the
meaning of paragraph 2. In settling this question, the competent authorities may
refer not only to the above-mentioned indications but to a number of circumstances
enabling them to establish that the real employer is the user of the labour (and not
the foreign intermediary):

— the hirer does not bear the responsibility or risk for the results produced by
the employee's work;

— the authority to instruct the worker lies with the user;

— the work is performed at a place which is under the control and responsibility
of the user;

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— the remuneration to the hirer is calculated on the basis of the time utilised,
or there is in other ways a connection between this remuneration and wages
received by the employee;

— tools and materials are essentially put at the employee's disposal by the
user;

— the number and qualifications of the employees are not solely determined by
the hirer.

OBSERVATION ON THE COMMENTARY

[4f] 13. Switzerland is of the opinion that the comments in paragraph 8 above
should only apply to situations of international hiring-out of labour in case of abusive
arrangements.

14. [Deleted on 21 September 1995]

RESERVATIONS ON THE ARTICLE

[4g] 16. Germany and Norway reserve the right to include an express reference
in paragraph 2 to income earned by hired-out personnel of one Contracting State
working in the other Contracting State, in order to clarify the understanding that the
exception in paragraph 2 does not apply in situations of ‘international hiring-out of
labour’ (cf. paragraph 8 above).

[4h] 17. Ireland, Norway and the United Kingdom reserve the right to insert in
a special article provisions regarding income derived from dependent personal
services relating to offshore hydrocarbon exploration and exploitation and related
activities.

[4i] 18. [Deleted on 21 September 1995]

[4j] 19. Switzerland reserves its position on sub-paragraph a) of paragraph 2 and


wishes to insert in its conventions the words ‘in the fiscal year concerned’ instead of
the words ‘in any twelve month period commencing or ending in the fiscal year
concerned’.

[4k] 21. Greece reserves the right to insert speical provisions regarding income
from dependent personal services relating to offshore activities.

II. Explanatory Notes on the Model Conventions

1. Conformity and divergence

[5] The MCs are largely identical in substance. The OECD MC now differs from the
other MCs with respect to the calculation of the 183-day period as a result of the
changes made to the OECD MC in 1992.

2. Explanatory notes

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[6] a) Main features: Art. 15 is based on the rule that income from dependent
personal services is taxable exclusively in the State of residence (‘shall be taxable
only’, see supra Pre Arts. 6 to 22, at m.nos. 3ff). If an employment is exercised in
the other contracting State, however, the State of employment, being the State
of source, has the primary right to tax (place-of-work principle), though not if the
employee is present in this state for not more than 183 days within a 12-month
period and the remuneration is paid by or on behalf of an employer which is not
resident in the State of the place-of-work, and is not paid by a permanent
establishment or fixed base of the employer in the State of employment. The
question of taxation of the remuneration in the State of residence is left open by Art.
15 (‘may’, see supra Pre Arts. 6 to 22, loc. cit.). Whether that State should grant
exemption or allow credit for tax paid to the State of source, depends on Art. 23 A or
23 B (see infra Art. 23, at m.nos. 36ff.). As a fall-back rule, residence-based taxation
occurs if the three requirements listed for an exception from the place-of-work
principle (two negative and one positive) are cumulatively met.

[6a] To the extent that they retain the right to tax under the rule just described,
both the State of residence and the State of employment impose their tax in
accordance with their domestic law without being restricted by the DTC in so doing.
This includes the possible levying of a withholding tax on wages (‘pay-asyou-earn’)
(confirming: Conseil d'État, req.n. 58.034 and 58.597, 42 Dr. Fisc. comm. 1078
(1990)). However, it is irrelevant if the taxpayer is actually taxed in the State of
employment. For exceptions from this principle, see m.nos. 37f., 47. Not filing tax
returns with the foreign tax authorities may violate a legal obligation, but it has no
legal consequences in the State of residence (BFH BStBl. II 61 (1975)).

[7] The default rule that the State of residence shall be entitled to exclusive
taxation is in line with the systematic approach adopted by the MCs. It is based on
the consideration that, of the two States, that of residence is likely to be in a more
favourable position to make comprehensive use, under its own tax law, of the right to
tax income from both domestic and foreign sources. Taxation by the State of
residence continues to be the rule where employment is exercised no more than
temporarily in the other contracting State, because in such a case the ties with that
other State will still lack the necessary closeness (Korn/Debatin, Syst. IV, Rdn. 278).
This facilitates sending abroad qualified personnel, a practice that is becoming more
and more important with growing international economic interdependence. Certainly,
though, the field of application of Art. 15 is not limited to these ‘qualified workers’.
Rather, it applies to all individuals who render dependent personal services.
Paragraph 3 of the MC Comm 1992 now confirms this expressly (see also paras 7f. of
the OECD Report on the 183 Day Rule, supra m.no. 1).

[8] b) Scope: There are special arrangements in respect of those employed aboard
a ship or aircraft in international traffic, or aboard a boat engaged in inland
waterways transport (Art. 15 (3)), directors' fees (Art. 16), artistes and sportsmen
(Art. 17), pensions (Art. 18) and payments from public funds (Art. 19). All these take
precedence over the general rules of Art. 15. Consequently, Article 15 deals with
remuneration paid in respect of present employment with a private employer.
Remuneration in respect of an employment, disbursed by a body organized under
private law and having a separate juridical personality, comes under Art. 15 even in
those cases where such a body's financial means are supplied entirely from public
funds. According to Art. 19 (3) MC, Art. 15 also applies to remuneration paid by a
public body, if that body runs a business enterprise and the remuneration in question
is paid in respect of employment exercised within that enterprise.

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[9] Regarding the distinction between remuneration in respect of dependent
personal services and director's fees, see infra Art. 16, at m.no. 8, and between such
remuneration and that accruing to artistes and sportsmen, see infra Art. 17, at m.no.
8. In view of Art. 15 (2), this distinction is of particular significance where artistes and
atheletes are involved, because such persons are invariably taxed at the place where
they exercise their activities, irrespective of any minimum stay in the State
concerned and irrespective of where the payer of the remuneration is resident. If
DTCs contain special provisions regarding professor and foreign teachers or
independent personal services rendered by students or business apprentices, such
provisions, being rules of a more special type, take precedence over the general rules
of Art. 15 (see infra m.no. 97; and Art. 20, at m.no. 27).

[10] Difficulties arise when drawing the line between Art. 15 and Art. 18.
Remuneration paid after an employment has ceased may either be wages or
salaries paid in retrospect, which are treated according to Art. 15, or pensions,
which come under Art. 18. The distinction in such cases must be made by looking at
the reason for the payment, rather than at the point of time it is made. Severance
pay designed to ease the burden on employees moving to another job or switching to
a different occupation, and especially those paid on premature dismissal and
designed to bridge a waiting period, comes under Art. 15 because it is based on an
employment relationship (concurring: BFH BStBl. II 459 (1972) and 819 (1988):
Germany's DTCs with Switzerland; Hoge Raad, Rolno. 25.075 BNB 1989/2: DTC
Netherlands/Belgium, with a summary, well worth reading, by Advocaat-Generaal
van Soest; ÖstBMF of 11 February 1994, 4 SWI 75 (1994): DTC Austria/Switzerland; a
different view was for a long time held by the Swiss federal tax authorities that
applied Art. 21 to such remuneration, see Locher/Meyer/v. Siebenthal B. 15.1 Nr. 5,
and BFH BStBl. II 757, 758 (1973): Germany's DTC with Switzerland of 1931; an
Agreement of Understanding (Verständigungsvereinbarung) concluded between the
German Ministry of Finance and the Swiss federal tax authorities, however, now
follows the view of this commentary (see BMF of 13 October 1992, 39 RIW 82
(1993)). However, mere classification of such severance pay under Art. 15 does not
necessarily imply that it may be taxed exclusively in the employee's State of
residence (as BFH, however, thinks, see BStBl. II 819 (1988)); there may, on the
contrary, be a case for a split pro rata temporis, (cf. infra m.no. 15).

[10a] A pension, on the other hand, is involved in those cases where the payment
is in the nature of a benefit for old-age, disability or the like (BFH BStBl. II 459 (1972):
Germany's DTC with Switzerland). Severance pay granted in lieu of a pension when
an employment comes to an end, should be treated as a pension within the meaning
of the MCs and, consequently, comes under Art. 18 (BFH BStBl. II 65 (1976):
Germany's DTC with the Netherlands). Lump sum payments made in commutation
of an existing claim to a pension have been held by the Netherlands Hoge Raad not
to constitute a ‘pension’ within the meaning of Art. 18 since, under Netherlands law,
the latter term encompassed only such payments as are earmarked as old age
benefits (Hoge Raad, Rolno. 19.934, BNB 1981/242: DTC Netherlands/Australia); but
they should be considered ‘similar remuneration’ within the meaning of Art. 18 (as
Hof s'Hertogenbosch thinks, Rolno. 3764/81, BNB 1986/53: DTC Netherlands/France;
the DTC Netherlands/Australia did not contain that phrase). For further references to
Netherlands case law, which is particularly extensive on this point, see 25 ET 123 and
287 (1985), 26 ET 27, 56 and 190 (1986).

[11] According to its wording, Art. 15 is not restricted to remuneration derived in


respect of dependent personal services from sources in a contracting State. It differs
from other distributive rules in that it, therefore, applies to remuneration received
from sources in third States as well. As a result, Art. 21 is not applicable to

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income from dependent personal services (also Jann, M., supra m.no. 1, at 199;
diverging opinion: Geiger, O., & Alscher, K., IWB F. 3, Deutschland Gr. 2, 613, 617
(1994); Keine, S., & Bertram, F.J.W., IWB F. 3, Deutschland Gr. 2, 591, 610 (1992);
Henkel, U., & Fischer-Zernin, J., 32 RIW 286 (1986)).

[12] c) Rule: If

— a resident of a contracting State

— derives salaries, wages or similar remuneration

— in respect of dependent personal services,

Art. 15 generally allows only the State of residence to tax such items of income.
However,

— if the employment is exercised in the other contracting State, and

— the recipient of the remuneration is present in that other State (the State of
employment) for a period or periods exceeding in the aggregate 183 days in
any 12-month period commencing or ending in the fiscal year concerned,

— or the remuneration is paid by, or on behalf of, an employer who is not a


resident of the other State,

— or if it is borne by a permanent establishment or a fixed base which the


employer has in the other State,

the State of employment has the right to tax rather than the State of residence.

[13] Regarding the term ‘resident of a contracting State’, and that of a ‘resident
employer’, see supra Art. 4, at m.nos. 9f.; as to the term ‘permanent establishment’,
see supra Art. 5, at m.nos. 20ff.; in respect of the term ‘fixed base’, see supra Art. 14,
at m.nos. 22ff.

[14] d) ‘Salaries, wages and similar remuneration’: The MCs fail to define the
term ‘income from dependent personal services’. All they do is to enumerate typical
forms of income that an employee is capable of receiving in respect of employment.
The particular receipts that constitute ‘income from dependent personal services’ can
be determined, however, by a grammatical and systematic interpretation (see infra
m.no. 16). When a person performs a dependent service, all consideration received is
‘income’ from such service under Art. 15. The MC text aims at as broad an
interpretation as possible; this is shown by the examples given of types of
remuneration that fall under the provision. A broad interpretation is necessary in
particular to ensure that all types of employee income taxable under domestic laws
are included with as few loopholes as possible (see supra Pre Arts. 6 to 22, m.no. 2).
The terms ‘salary’ (salaires) and ‘wages’ (traitements) refer to regular payments for
services made by an employer. The difference between these two terms is that the
first is earned by white-collar employees (civil servants, secretaries) while the latter
is paid for physical labour (construction workers). Remuneration (rémunérations) is
the general term that encompasses not only salaries and wages, but other forms of

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compensation (including one-time ‘payments’, such as anniversary bonuses, BFH
BStBl. II 660 (1992): Germany's DTCs with the USA and Canada; compensation for
lost income, FG Rheinland-Pfalz, 2 IStR 472 (1993): Germany's DTC with the USSR)
which an employee may receive from his job. The common element for all three
terms is that they all presume a connection between the work performed and
the compensation. In this respect, the forms of compensation included under Art.
15 are not different from the income from other types of occupations. Arts. 14 and
17, in which the MCs use ‘income’ instead of ‘remuneration’, also determine the type
of income governed by these provisions by designating the occupation and, further,
by requiring a connection between the activity performed and the payments
received. The different wording, therefore, does not justify any further inferences
(inferences are drawn, though to that extent not convincingly, by the Canadian
Federal Court, Trial Division, Hale v. The Queen, 90 D.T.C. 6481 (1990): DTC
Canada/UK).

[14a] Whether such a connection exists depends on the reason for the payment.
If the employer has a business-related and not just personal interest in the activity,
one can generally infer that there is a connection to the working relationship (for the
treatment of ‘fringe benefits’ and the difficulties in defining their limits, see OECD,
The Taxation of Fringe Benefits, Paris (1988)). It is sufficient if the compensation is
rendered in order to increase the employee's dedication to the enterprise and to
make the enterprise more attractive for qualified personnel (e.g., the opportunity to
acquire the company's stock at a reduced price). In uncertain cases that cannot be
solved by an autonomous interpretation, reference may be made to the domestic law
of the state levying the tax (cf. BFH BStBl. II 195 (1978)). It is not relevant, however,
how the payment is classified under the domestic law.

[14b] Cash received or payments in kind are also both equally covered, as is any
currency used for the compensation. German compensation paid to a foreign
employee in the case of bankruptcy (‘Konkursausfallgeld’) also comes under the term
‘income from dependent personal services’ and is capable of being taxed in the State
of employment (BMF BStBl. I 486 (1979); this includes winter and bad weather
allowances in relation to Austria: FinMin Nds. of 18 August 1977, 30 DB 1875 (1977)).
The same applies to remuneration paid after termination of an employment to ensure
that an ex-employee will refrain from competing with his former employer (FG Baden-
Württemberg, 32 EFG 183 (1984): Germany's DTC with France; see infra m.nos. 20f.).
As far as France is concerned, the Conseil d'État ruled that an extra allowance
granted to an employee for work abroad was an element of that portion of his
remuneration that is taxable in his State of residence (in the case at issue, however,
the allowance was exempt under domestic law: Conseil d'État, 39 Dr. Fisc. comm.
1364 (1987): Germany's DTC with France; see also Conseil d'État, 41 Dr. Fisc. comm.
4 (1989) with annotations by Tixier, G.). Daily allowances paid by the European Union
authorities to employees from one member State temporarily working elsewhere with
the Union are also covered under Art. 15, though the taxation of their base salaries
from their home governments remains under Art. 19 (BMF of 2 May 1994, 76 FR 342
(1994)). With respect to option rights that an employer gives to its employees in the
context of their employment, two situations must be distinguished. If the option right
is accessible to an independent valuation, the value of the option is to be seen as
remuneration at the time at which the option was granted. In this case, the profits
which arise on the exercise of the option, i.e., the increase in the value of the option,
fall under Art. 13 (4), rather than under Art. 15, as this profit is no longer connected
to the employment (to that extent correctly is the Canadian Federal Court, Hale v.
The Queen, 90 DTC 6481; cf. also Portner, R., & Bödefeld, A., 33 DStR 629 (1995)). If
no value can be assigned to the option itself since at the time at which it is granted it
merely represents an uncertain chance to earn a profit, a benefit which may arise

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from the exercise of the option is postponed and, therefore, is income from
dependent services. In this case the value of those benefits' exercise is to be
apportioned based on the period or periods of dependent services, meaning shares
attributable to a foreign activity that is exempted under Art. 15 are to be excluded
from domestic taxation (see infra m.no. 15). The place where the option is exercised
and DTCs with this State are, in contrast, immaterial (FG Hessen, 39 EFG 730 (1991):
Germany's DTC with France).

[14c] If the employer settles tax debts owed by the taxpayer, these payments are
likewise to be seen as remuneration under Art. 15 (1), even if they are remitted
directly to the tax authorities (Australian Administrative Appeals Tribunal - Taxation
Appeals Division, 21 AAT 3630 (1989/90): DTC Australia/USA; see also Vann, R., &
Burns, L., 2 TNI 1239 (1990)). Social benefits such as day care services, etc., and
social insurance contributions paid by the employer belong to income from
dependent services, too. Such benefits, however, are often tax-free under domestic
law (as for example, the employer contributions to the German social insurance
system under § 3 Nr. 62 EStG). Contributions paid by the permanent establishments
of foreign enterprises to their domestic pension funds are, therefore, in principle,
included under Art. 15 (FG Hessen, 39 EFG 649 (1991): Germany's DTC with France).

[14d] Regarding a provision in the Netherlands' DTC with Switzerland, according to


which taxation of management salaries is divided evenly between the two
contracting States, the Netherlands Hof s'Hertogenbosch ruled that ‘salaries’ (salaris)
means gross income, so that a Swiss taxpayer may not deduct expenses in the
Netherlands (Hof s'Hertogenbosch, BNB 1991/12). This decision is hardly convincing
(critical is also Ellis, M., 3 TNI 642 (1991)).

[15] For the application of the treaty, it is irrelevant when (pre-paid and subsequent
remuneration are thus also included) and where the remuneration is paid; all that
matters is whether it accrues to the employee in respect of the period he spent
abroad (BFH BStBl. II 459 (1972) and 757 (1973): both on Germany's DTC with
Switzerland; US Rev. Rul. 86-145, 1986-2 Cum. Bull. 297; see also Bertram, F.J.W.,
IWB F. 3, Deutschland Gr. 3, 1109ff.). Such attribution may cause difficulties in
particular situations; in cases of doubt the taxpayer must furnish adequate proof (cf.
Hale v. The Queen, 90 D.T.C. 6481, 6488ff. (1990)). If a payment relates both to a
period in respect to which only the State of residence may tax it, and to a period in
respect of which the State of employment is entitled to tax it, the payment must be
split up pro rata to those periods. The agreed remuneration per working day is then
related to the agreed number of working days, working days being understood to
mean a year's calendar days minus all those days on which the employee's
employment contract does not require him to work (days of leave, Saturdays off,
Sundays and public holidays). Even if the stay is restricted to a number of hours per
day, the remuneration must be split up accordingly (BFH BStBl. II 479 (1986); 161
BFHE 482: both on Germany's DTC with Italy 1925). This applies to both current and
to non-recurring payments (shares in profits paid to managers, severance pay,
bonuses, holiday allowances: BFH BStBl. II 728 (1970): Germany's DTC with India; cf.
OFD Münster of 19 December 1986, 75 DStZ/E 114 (1987)). Changes in the
remuneration during a calendar year must also be taken into account (BFH BStBl. II
479 (1986); cf. OFD Münster of 19 December 1986, 75 DStZ/E 114 (1987)). Where the
remuneration is paid and whether the employer has a permanent establishment at
the place where the services are exercised, is irrelevant (FG Berlin, 19 EFG 58 (1971):
Germany's DTC with Austria).

[16] e) Nor do the MCs define the term ‘dependent personal services’.

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Paragraph 3 of the OECD MC Comm. (supra m.no. 4) names only some activities as
examples (sales representatives, construction workers, engineers) which typically fall
under the term. But - as in regard to various other classes of income (business,
independent personal services) - it can be assumed that the MCs are based on a
common understanding of the type of activities to be covered by the term
‘dependent personal services’. The term is accordingly to be derived on the one hand
by distinguishing it from other types of income (particularly from business profits and
income from independent activities) and on the other hand by referring to a common
international understanding. Dependent services may thus be presumed if a person -
the employee - makes his capacity for work available to another - the employer - and,
in performing such activities, the employee is obligated to follow the directions and
instructions of the employer (Coulombe, G., CDFI LXVIIb 63, 64ff. (1982)). It would,
therefore, not be permissible for a contracting State to exclude arbitrarily from the
scope of ‘dependent personal services’ an activity falling under this understanding
(e.g., that of an industrial worker). However, where the classification of activities may
come up against doubts, it would be proper to resort to the domestic law concerned
for classification (FG Hamburg, 9 EFG 75 (1961): Germany's DTCs with UK; BFH BStBl.
II 392 (1967): with Switzerland; 88 (1972): with Austria; 757 (1973): with
Switzerland).

[16a] Indicative of ‘dependent services’ is thus - both from the employment law as
well as from the tax law perspectives - the integration of the dependent activity into
the enterprise of the employer so that the employee is under the direction of the
employer and must follow his instructions.

According to German law, an activity constitutes ‘dependent personal services’ if


the person involved is committed to supply his capacity for work (‘Arbeitskraft’) in
such a manner that he is subordinated to his employer's directions in the exercise of
his vocational discretion or that he is bound to obey his employer's instruction within
the organizational set up of the latter's business (§ 1 Abs. 2 LStDV). A good example
for the role of the criterion of ‘integration’ is in a decision of the Danish
Landsskatteret (R&R nr. 5 SM 78 (1990): Denmark's DTC with Germany). In this case,
the advisory activity of a German resident marketing expert performed for a Danish
company was deemed to be a dependent service as he was a member of the board
of directors and received a monthly salary. However, following his departure from the
company, he was compensated for his advisory activities only for the amount of days
he actually worked; he was then considered ‘independently’ employed.

[16b] The term ‘dependent services’ also encompasses the activities of the
directors and managers of the company liable for corporate taxation as long as
they do not fall under the special rule of Art. 16 (for the limitation, see infra that Art.,
at m.nos. 11ff.). Because of their nature, problems arise with respect to determining
the place where their work is exercised (see infra m.nos. 19, 37). Remuneration
received (directly or indirectly) by a partner in a partnership (for its status as an
employer, see infra m.no. 29) from the latter in respect of dependent personal
services, constitutes business income under German domestic law (§ 15 Abs. 1 Nr. 2
EStG), but continues to be income from dependent personal services under treaty law
unless otherwise provided by the DTC in question (see supra Art. 7, at m.nos. 41, 44;
concurring Malherbe, J., & Malherbe, P., RDAI 437, 460 (1986)). The view developed
here has been opposed by FG Münster, 37 EFG 294 (1989): Germany's DTC with Italy
1925. This ruling is correct in applying, mutatis mutandis, Art. 3 (2) MC, a provision
not included in the DTC with Italy 1925; but in so doing, the ruling overlooks the fact
that in this particular case the ‘context’, viz. the general pattern of the treaty,
requires an interpretation departing from domestic law. The view held by FG Münster
may result in double taxation, but it may, by means of cleverly devised

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arrangements, just as well result in double exemption; it thus also fails to observe the
object of common interpretation.

[17] f) As a rule, the place where the employment is exercised is the place
where the employee is personally present for the purpose of exercising his
employment. If the activities cannot be exercised elsewhere than on the spot, there is
no question that this spot is the place where employment is exercised. And this
applies whether or not the stay necessary for performing these activities is merely a
temporary one (BFH BStBl. II 804 (1971); 402 (1983); 625 (1983): each re Germany's
DTC with Italy 1925). It is irrelevant whether or not the situation requires the
activities to be performed abroad exclusively on the spot. All that matters under the
MCs is whether or not the employee is personally present. There is nothing in them to
indicate that a restricted interpretation might be called for (view shared by von
Bornhaupt, K.J., loc. cit., at 10, in opposition to BFH BStBl. II 402 (1983)). The former
view may, if at all, be of significance in cases where abuse or sham might be
involved. If there is a change in the place of work, taxation will depend on the length
of time worked in the one and in the other State (see supra m.no. 15). Any holiday
allowance would then have to be split up accordingly.

[18] Everything functionally connected with the activity exercised at the place of
work should be included in that activity (Runge, B., 32 BB 184 (1977)). Thus, for
example, the time that the employee spends in the State of employment while
travelling from his State of residence to his place of work and returning home, is so
includible (Popp, M., 29 DB 2083 (1976)). This does not apply if the outward or inward
journey is interrupted, say, for holiday purposes. Customary stoppages, such as those
for travels to company headquarters to submit a report, for a holiday or sick leave in
the State of residence, should not be considered a temporary relinquishment of the
place of work abroad (Popp, M., loc. cit., at 2083). These principles differ from those
applied when calculating the length of a stay under the 183-days-clause (see infra
m.no. 22).

[19] In regard to activities other than manual labour, the question may arise
whether the activity is ‘performed’ at the place where it becomes effective (e.g. if
the activity consists of issuing instructions) rather than at the place where the
individual is actually present at the time he performs his activities. Thus, German
case law has laid down the rule in connection with activities performed by a
company's governing bodies that such activities are deemed to have been
performed at the place where the company's headquarters are located, even if the
individual involved's presence there is no more than casual (RFH RStBl. 417 (1934) re
Germany's DTC with Italy 1925; 812 (1938) re Germany's DTC with Switzerland; BFH
3 HFR 228 (1962) and BStBl. II 68 (1972), both re Germany's DTC with Switzerland; II
402 (1983): Germany's DTC with Italy 1925; likewise ÖStVwGH 33 ÖStZB 58 (1980);
ÖStZB 127 (1992); ÖStZB 833 (1992), all re Austria's DTC with Germany). However, if
such an individual is sent abroad exclusively to represent his firm's interests there,
the rule should not be applicable (RFH RStBl. 417 (1934) re Germany's DTC with Italy
1925; 812 (1938); BFH BStBl. III 441 (1960), both re Germany's DTC with Switzerland)
and furthermore not if the activities abroad do not consist of issuing instructions but
rather, e.g., of purchasing goods (BFH BStBl. II 625 (1983): re Germany's DTC with
Italy 1925; BStBl. II 739 (1986) - even if the first-mentioned ruling appears to indicate
that everything depends on the manager's place of residence in the domestic
territory, this matter is clarified by the second ruling) or if the activities abroad,
rather than being in the nature of managerial activities, consist only of giving advice
(FG Hamburg, 36 EFG 506 (1988)). Conversely, the reconciling of business policies
with a foreign parent company is deemed to be a domestic activity, because the
latter is not terminated until instructions have been given in the subsidiary's home

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country (FG Hessen, 33 EFG 182 (1985); possibly divergent BFH BStBl. II 739 (1986)).

[19a] These rulings are based on the consideration that where performance of work
essentially consists of the exercise of managerial functions, the activities of the
individual involved are not restricted to making and announcing decisions, but extend
to his using his personality and managerial skills to ensure that his instructions are
obeyed. Consequently, this reasoning assumes that the weight of an instruction
comes to bear at the enterprise's headquarters even if the individual concerned is
not present there from time to time. However, such argument is not convincing,
because it amounts to looking at the place where the activity is exploited rather
than at the place of (‘natural’) activity (critical are also Schaumburg, H., supra m.no.
1, at 715; Bendlinger, S., 3 SWI 287f. (1993)). It is not surprising that this opinion is
not shared by Germany's contracting States, some of which insist that such
individuals' place of work is the place at which he is actually present (cf. Zürcher
VerwG. of 3 November 1961, reproduced in Meyer-Marsilius/Hangarter, Art. 15, Nr.
7.1 re Art. 4 (1) of Germany's DTC with Switzerland 1931, a treaty which, however,
has in the meantime been replaced by the 1971 DTC); due to this view, the Swiss
authorities attempt to negotiate special rules for this type of case in their treaties;
see infra m.no. 37 and as an example, Art. 7 (2) DTC Switzerland/Netherlands,
according to which each state may tax half of the Netherlands income of a Swiss-
resident manager. The BFH (7 BFH/NV 146 (1991) re Germany's DTC with Canada)
qualified its view for the case when a resident exercises management activities for a
foreign company and the other contracting State involved does not interpret Art. 15
as the BFH does. In a recent decision, the BFH finally departed from its conventional
interpretation (and thus also from the decision of the Grand Senate (Groer Senat) in
BStBl. II 68 (1972), which concerned a largely identical provision in Germany's DTC
with Switzerland 1931/59, a provision that was abrogated by Art. 15 (4) as adopted
by the DTC revision of 1971). The BFH now refers to the actual stay for managers, too
(BStBl. II 95 (1995): Germany's DTC with Canada; critical is Kramer, J.-D., 41 RIW 742
(1995)). This will normally lead to a distribution of the taxation of such remuneration
between the contracting States. The taxpayer, in principle, has the burden of
establishing how the remuneration should be divided, so that it is in his interest to
maintain adequate records (cf. the German tax authorities, BMF letter of 5 july 1995,
BStBl. I 373 (1995)).

[20] Particular problems tend to arise whenever the activity required is in the form
of an abstention from certain activities. In a case where abstention means that the
individual concerned has to be available although he is never called upon to exercise
any activity, his ‘work’ is deemed to have been performed at the place where he was
actually present during the time he was committed to be available (BFH BStBl. II 579
(1969); 867 (1970), both re Germany's DTC with USA 1954/65). If, on the other hand,
the performance required is an abstention, for a consideration, from competing
with the payer, a ruling by BFH (BStBl. II 867 (1970)) holds that the place of
‘performance’ should be deemed to be the place where the competitive activities
would presumably have been exercised if the individual had acted in breach of
contract. If, however, there is no direct connection between the agreed abstention
and the territory of the contracting State concerned, in other words, if failure to
honour the commitment could occur anywhere in the world, the place where the
person committed was physically present must, in the absence of any other more
specific criteria, according to BFH, be taken to be the place where he honoured the
commitment. In another ruling, BFH differentiates in respect of the nature of the
abstention, viz. whether it was the main feature of the contract or whether it was
merely ancillary to a former employment regarding active personal services (BStBl. II
195 (1978), re Germany's DTC with Switzerland). In the latter case, according to BFH,
the place of abstention should be deemed to be the place where the preceding

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personal services were performed.

[21] Such a differentiation, however, runs counter to the systematic


approach of the MCs. Double taxation can be avoided only if the remuneration paid
for different activities can be treated separately, irrespective of whether or not they
were performed for one and the same employer. According to your commentators'
view, therefore, it is wrong to determine the place of activity by looking at the
previous place of work (view shared by Hellwig, P., 66 DStZ/A 83 (1978); von
Bornhaupt, K.J., loc. cit., at 11; Jann, M., supra m.no. 1, at 204). For commitments that
come under one and the same contract of employment and which the employee
honours in different States, are nearly always connected in some or other way.
Moreover, BFH case law leads to totally different criteria being applied to active
performance on the one hand and to abstention on the other. In respect of royalties
accruing to an inventor after the latter has retired from his business, case law holds
that the place of activity is that at which the inventor is actually present (BFH BStBl. II
76 (1977): Germany's DTC with Italy 1925). In respect of the remuneration accruing
to a former member of a German company's board of management as consideration
for his abstention from competing with his old firm, the place of activity should be
that where his previous activity was exercised (BFH BStBl. II 195 (1978): Germany's
DTC with Switzerland; see in this connection also FG Baden-Württemberg, 32 EFG
183 (1984) in which case, however, neither the former activity was exercised in, nor
the agreed abstention from competing was related to, Germany). There is no obvious
reason for such differing tax treatment of these two doubtlessly comparable
situations. In the interest of consistency in tax treatment, it should, therefore, be
assumed, that, also in connection with remuneration paid for a promise to abstain
from competition, the place of work is where the individual concerned was actually
present when honouring his commitment, viz. when abstaining from competition (cf.
Vogel, H., 33 BB 1025 (1978)).

[22] g) The 183-day period: The State of residence has the exclusive taxation of
the remuneration if the recipient is present in the other contracting State (State of
employment) for a period or periods not exceeding in the aggregate 183 days
in any 12-month period commencing or ending in the fiscal year concerned.
Thus, the length of the employee's physical presence is decisive (MC Comm.
para. 5, supra m.no. 4b; BFH BStBl. II 755 (1989), re Germany's DTC with the
Netherlands), rather than the length of time spent on his activities (BFH BStBl. II 425
(1978), re Germany's DTC with the USA 1954/65). The reason for this is that physical
presence can be easily determined and proven by the taxpayer, when requested (MC
Comm. para. 5). Being ‘present’ is a treaty term that is to be autonomously
interpreted. It is not to be determined by reference to the treaty use of habitual
abode (Art. 4 (2) (b)) or to the domestic use of that term (as done by BFH 154 BFHE
38; BStBl. II 944 (1988); BStBl. II 755 (1989), re Germany's DTC with the Netherlands;
31 HFR 75 (1991), re Germany's DTCs with Spain and Italy 1925; see also the non-
application decree of the BMF of 30 July 1990, BStBl. I 314 (1990)), for this term
serves to determine residence which is an entirely different goal.

[22a] The principles applied when calculating the 183-day period differ from those
applied to the question of what ‘activity’ at the place of work means, i.e. the first and
fundamental condition for taxation in the State of employment (supra m.nos. 17f.).
According to the MC Comm. (para. 5, supra m.no. 4b), the following days are
included in the calculation: presence for only part of a day, days of arrival and
departure (confirming is the Norwegian Híyesterett, Rt. 752, 765 (1994)), all other
days present such as Saturdays and Sundays, national holidays, holidays or vacations
before, during or after the activity, short breaks (training, strikes, lock-out, delays in
supplies), sick days and workdays missed due to death or sickness in the family. Not

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included is travel time spent outside of the State of activity (however, Tribunal
administratif de Paris counted time spent travelling abroad by the head of the Paris
branch of a news agency as time spent on his activities in France, 30 Dr. Fisc. comm.
1724 (1978): DTC France/USA) and days which are spent exclusively outside the
State of activity (including where activities in the State of residence merely serve to
prepare for the presence abroad; cf. FG Köln, 32 EFG 460 (1984), re Germany's DTC
with Italy 1925) such as the 14 days off work spent in his State of residence by an oil-
rig driller following work periods of 14 consecutive, 12 hour days (Hof Amsterdam,
Rolno. 1193/81, 25 ET 80 (1985)). The German tax authorities have largely followed
these principles (BMF of 5 January 1994, BStBl. I 11, 12 (1994)). According to the
latter ruling, truck drivers and other professional drivers may not include days spent
travelling to and from the State of destination. However, it is unclear whether this
refers to the calculation of the 183-day period; it probably was only meant for
Germany's DTC with Italy 1925, which did not contain a 183-day clause. The Austrian
Finance Administration has also aligned its method of calculation to that of the OECD
principles (see ÖStBMF of 18 November 1991, 1 SWI 353 (1991)) and uses them with
respect to non-OECD states as well (ÖStBMF of 13 March 1993, 3 SWI 107 (1993):
DTC Austria/Russian Federation).

[22b] From the foregoing discussion the general principle may be derived that the
term of ‘presence’ should be interpreted as close to literally as possible. This principle
is, however, sometimes carried too far by maintaining that, in contrast to the view
of this commentary (confirming it: FG Münster, 42 EFG 648 (1994), re Germany's DTC
with Spain), trips home on weekends and holidays are not to be included in the
calculation of the 183-day period. It is doubtful whether such a restrictive
interpretration, which looks at the individual days rather than the period as a whole,
is in accordance with the purpose of the 183-day rule to distinguish a ‘short-term’
from a ‘longer-term’ stay abroad. In any case, even the MC Comm. is not
unambiguous in this respect. For example, the express inclusion of work interruptions
due to death or sickness in the family only makes sense if, at the same time, the
employee's trip that is necessitated by such illness is included. It may therefore be
presumed that short trips home on weekends or holidays are still not to be included
in the calculation of the 183-day period. This is not a question of which method is
chosen (as the OECD Report, paras 13ff., maintains), but rather of an adequate
interpretation of the provision.

[22c] Vacation days which are not spent in the State of activity are, in principle, not
to be included. Para. 6 MC Comm. 1992 recommended correctly, however, flexible
treatment in those cases in which the vacation days ‘are clearly related or not related
to the activity’. A relationship of this type is presumed when the holiday is physically
or temporarily associated with the foreign activity (FG München, 34 EFG 274 (1986),
re Germany's DTC with USA 1954/65). The 1995 change to the MC Comm. deleted
para 6 in favour of a narrower interpretation. If work abroad is interrupted due to
sickness, it is generally to be presumed that the connection with the activity abroad
continues. The length of the interuption due to illness does not matter. An exception
is established in the MC Comm. for cases in which the sickness to the employee
hinders his return trip home. Days of arrival and departure are in principle
included, though not those days on which the employee has not yet travelled (or no
longer travels) in the State of activity (German administrative practice was generous
here, see OFD Kiel of 20 September 1978, 61 FR 565 (1979); BMF BStBl. I 88 (1980) -
Mutual Agreement to Germany's DTC with France). It is thus necessary that the
employee spend at least some time in the State of activity on these days (see also
BFH 31 HFR 75 (1991): Germany's DTC with Spain).

[22d] In all other respects, the wording of Art. 15 (2) fails to indicate how much of

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a specific day an employee must have spent in a foreign contracting State for such
a day to be counted towards his presence there, and it is also not specified in the MC
Comm., which only mentions partial presence. According to the OECD Report on the
183-day rule, para 12, each brief stay in the State of activity should count as a day
present (however, under US practice, a day only counts during which an employee
was present in the State of employment for more than eight hours, Rev. Rul. 57-330,
1957-2 Cum. Bull. 1013). This contrasts with the case law of the BFH which presumes
that a ‘stay’ or ‘presence’ only exists when the employee also regularly spends the
night in the State of activity (BFH BStBl. III 352 (1965); II 755 (1989): both Germany's
DTC with the Netherlands; similar also to the Hoge Raad, Rolno. 15581, BNB
1966/202: DTC Netherlands/Germany). BFH's case law results from its view rejected
by this commentary that the term ‘presence’ in Art. 15 is to be interpreted by
reference to the domestic German concept of ‘gewöhnlicher Aufenthalt’ (§ 9 AO,
‘habitual abode’). A commuter may not have a German ‘habitual abode’ if he
regularly drives back to the place where he lives (even this is questionable, see
Prokisch, R., 37 RIW 396, 397ff. (1989)), however, he is temporarily present in the
State of activity under Art. 15 (concurring is the German Finance Administration, BMF
of 30 July 1990, BStBl. I 314 (1990); BMF of 5 January 1994, BStBl. I 11 para 2
(1994)). The revision of the MC Comm. should give the BFH occasion to reconsider its
case law.

[23] According to the OECD MCs before 1992, the UN and the US MCs, taxation
remains with the residence State if the employee's presence in the other State does
not exceed 183 days within the fiscal year concerned. That leads to problems
when the employee's presence may be for more than 183 days, yet the time limit
would not be exceeded in one particular year. MC Comm. 1992 paragraph 4 (supra
m.no. 4a) primarily views this issue as one which creates tax avoidance
opportunities. The provision may, however, in particular cases, also hurt the
taxpayer.

[23a] The view has already been advanced that the exception laid down in Art. 15
(2) is not applicable whenever the employee is present in the State of employment
for more than 183 days in the year following that in which the stay was
correspondingly shorter. The State of employment should then, it is said, have the
taxationfrom the outset (Kempermann, M., in
Flick/Wassermeyer/Wingert/Kempermann, Art. 15, Anm. 42). However, that opinion
would result in a limitation of the applicability of Art. 15 (2) to a period of 12 months
at the most - six months in each fiscal year (endorsed by Locher/Meier/v.
Siebenthal/Kolb, B 15.2 Nr. 2; Popp, M., 29 DB 2083 (1976)). There was nothing in the
wording of the former Art. 15 (2) to support such an interpretation. What Art. 15 (2)
required was that the employee's presence in the State of employment must not
exceed 183 days in the fiscal year concerned, and that is all it required. It is only
then, but always then, that taxation is retained by the State of residence. Whether
the time limit was, or will be, exceeded in the past or in the following fiscal year or
whether the State of employment is entitled to taxation in one of these years, is
irrelevant (Korn/Debatin, Schweiz, p. 612; a different view is held in connection with
the German/USA DTC in Debatin/Walter, B X para. 101; cf. in this respect FinMin NRW
of 24 April 1987, 33 RIW 640 (1987)).

[23b] In view of these problems, Art. 15 (2) (a) OECD MC was changed in 1992.
According to the new provision, taxation remains with the residence State if the 183-
day period in the State of activity is not exceeded within a period of 12 months
commencing or ending in the fiscal year concerned. Expressed differently, presence
in different fiscal years is to be added together within a period of not more than 12
months to determine how many days within that 12-month period the taxpayer was

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in the State of activity. A 12-month period in the sense of MC 1992 begins with the
initial presence to perform the dependent personal services in the State of activity. If
the employee is still in the State of the activity after the expiration of this 12-month
period, a new one begins immediately. If he is not so present, a new 12-month period
will only begin to run at the start of the next stay, and so forth. This is a legal
improvement in comparison to the former situation. However, it should not be
overlooked that the time limits may also lead to considerable practical difficulties (cf.
Krabbe, 1, 0., H., StbJb 31, 33 (1993/94): Germany will therefore not follow the
change).

[24] Similar to the opinion explained supra m.no. 23, there was another one held in
Switzerland to the effect that Art. 15 (2) should, in all events, not be applied if a
short presence in the other contracting State follows one exceeding 183 days in
the preceding period. It is argued that in such an event, the presence is no longer a
‘temporary’ one, and that, as a result, the State of employment should retain its right
to tax in respect of the shorter period as well (Locher/Meier/v. Siebenthal/Kolb, B.
15.2 Nr. 2). It is certainly not quite satisfactory that in cases where an employee's
presence in the State of employment covers a period of two or more years, the latter
State should not be allowed to tax the activities exercised at the beginning and end
of that period because they account for no more than 183 days or less in the fiscal
years concerned. And it is also true that the author of Art. 15 (2) will have looked
primarily at a temporary presence (Philipp/Pollack, Z 15 Rdn. 12). But there is nothing
in the wording of Art. 15 (2) to suggest a restrictive interpretation (see now SchwBG,
60 ASA 373 (1991/1992): DTC Switzerland/USA). Those ‘time remnants’, during
which the State of employment may no longer tax the income received, may also
exist under the change to the revised OECD MC. The OECD Report, ‘The 183 Day
Rule’, supra m.no. 1, para 19, makes it explicitly clear that they are to be tolerated.
For this reason, too, all references to a ‘short-term employment’ were removed from
the MC Comm.

[25] If, in any one fiscal year, an employee is present in the State of employment
for a number of short periods, such periods should be aggregated
(Flick/Wassermeyer/Wingert/Kempermann, Art. 15, Anm. 42). This applies even in
cases where the employee's activities were exercised for more than one employer
(different view held by Korn/Debatin, Schweiz, p. 612) A 12-month period as meant
by the MC 1992 begins with the initial presence in the State of the activity for the
purpose of undertaking dependent employment. If the employee is still in the State of
the activity following the expiration of one 12-month period, a new one begins to run
immediately. Otherwise, a new 12-month period is calculated from the start of the
next time of presence, etc.

[25a] The term ‘fiscal year’ is used in both the old and new editions of the MC; it
has, however, different functions in each. In the old edition it limited the calculation
of the 183-day period, while in the new one it denotes the taxation period that is
impacted by this time calculation. For both versions, however, the meaning of ‘fiscal
year’ must be clarified, in particular if the contracting States have different fiscal
years, as should the question of which State's fiscal year is the relevant one. As far as
German taxation is concerned, the term ‘fiscal year’ means ‘calendar year’.
According to FG Düsseldorf (28 EFG 187 (1980): Germany's DTC with Spain), the full
calendar year prevails even in cases where a taxpayer moved house to the foreign
contracting State during the course of the calendar year and ceased to be subject
there to no more than non-resident tax liability. In cases where in one contracting
State fiscal year and calendar year coincide, but not so in the other State (see infra
m.no. 43), there may be some overlapping. A reasonable solution might be to regard
as prevailing the fiscal year of the employee's State of temporary employment,

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because the primary aim of Art. 15 (2) is to provide exemption from tax by that State.
According to the OECD Report on the 183-day rule (supra m.no. 1, para 21), this is
required by the context as meant under Art. 3 (2). The German Finance
Administration has followed this view expressly (BMF of 5 January 1994, BStBl. I 11
para 2 (1994); agreeing also FG Nds, 39 EFG 371 (1991): Germany's DTC with Israel).
Some national tax authorities have done so (cf. exchange of letters of 1 November
1972 on the DTC UK/Norway, reproduced in Edwardes-Ker, Art. 15, p. 17; cf. also OFD
Düsseldorf of 21 March 1988, 41 DB 1090 (1988): re Germany's DTC with India. The
Netherlands model income tax treaty contains an addition clarifying that the year in
which the 183 days are spent in the State of employment is the taxable year as
adopted by that State (van Raad, K., Intertax 241, 246 (1988)).

[26] According to a ruling by the Netherlands Hof Arnhem, a domestic labour


leasing firm that makes members of its labour force available to a foreign employer is
not required to withhold and surrender wage tax if it is reasonable to expect from
the outset that the activities abroad will involve a presence there of more than 183
days (Rolno. 288/1972, BNB 1974/109).

[27] h) A definition of the term ‘employer’ is not to be found in the MCs.


Reference to domestic law definitions, however, as is the case with the terms
‘dependent personal services’ and ‘income from dependent personal services’, is
necessary only in cases of uncertainty (see supra m.nos. 14a; 16). The meaning of
the term may be determined according to general criteria arising from the context
of the MC provision as well as from the inverse of the meaning of the term
‘employee’. Accordingly, an employer is someone to whom an employee is
committed to supply his capacity to work and under whose direction the latter
engages in his activities and whose instructions he is bound to obey. This definition is
also in accordance with the international understanding of the term ‘employer’
(Coulombe, G., LXVIIb CDFI 40ff. (1982)). The qualification thus follows objective
(formal) criteria. In contrast, the identity of the employee's contractual party and the
party paying the salary are irrelevant (BFH BStBl. II 71, 72 (1983)). For the
determination of the employer, it is not important who ultimately bears the
economic cost for the remuneration paid for dependent services rendered; economic
considerations are only significant regarding whether payment was made by the
employer or on his behalf (see infra m.no. 30; view also shared by Siefert, B., 32 RIW
979 (1986) and von Bornhaupt, K.J., 40 BB Beil. 16, at 13 (1985); a different view was
held by BFH BStBl. II 4 (1986): Germany's DTC with Spain; II 442 (1986): Germany's
DTC with Sweden, which considers this question for the definition of the employer
term) and regarding whether the employer is resident in the State of employment
(see infra m.no. 29). The question of who is the employer arises particularly in
situations in which the employee is sent abroad to work for a foreign enterprise as
well. In such cases, the determination of employer rests on the degree of personal
and economic dependence of the employee towards the enterprises involved.
Accordingly, the foreign enterprise does not qualify as an employer merely because
the employee performs services for it or because the enterprise gives the employee
instructions regarding his work, or places tools, etc., at his disposal (cf. Hinnekens, L.,
Intertax 331 (1988)). The situation is different if the employee works exclusively for
the enterprise in the State of employment and was released for the period in
question by the enterprise in his State of residence (BFH BStBl. II 4 (1986) re
Germany's DTC with Spain). However, there may certainly be two work relationships
simultaneously as well. Determining the employer, then, only depends on whether (at
least) one of them is responsible for the remuneration in the State of employment.

[27a] The employer need not be a ‘person’ as defined by Art. 3 (1) (a). Nothing in
the MC indicates that these two terms are intended to be related. Therefore, an

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employer may be any natural or legal person as well as any body of persons and any
unincorporated association or club. This is of particular importance for partnerships,
which are not a person under many DTCs, yet may be an employer (FG Rheinland-
Pfalz, 42 EFG 140 (1994): Germany's DTC with the USA 1954/65; Selent, A., & Endres,
T.D., 37 DB 84 (1984); Flick/Wassermeyer/Winger/Kempermann, Art. 15, note 48;
Schaumburg, H., supra m.no. 1, at 718). Some current German DTCs confirm this by
determining for partnerships where they are resident for purposes of the 183-day rule
(cf. infra m.nos. 44, 45).

[27b] From the context of Art. 15 (2) (a) - (c) it may be derived that neither a
permanent establishment nor a fixed place of business may be an employer
(BFH BStBl. II 4, 5 (1986): Germany's DTC with Spain; II 513 (1986): Germany's DTC
with France; ÖstBMF of 16 March 1992, 2 SWI 102 (1992): Austria's DTC with
Germany; Siefert, B., 32 RIW 979 (1986); critical Jacobs, Internationale
Unternehmensbesteuerung, at 171; differing also, FG München, 31 EFG 241 (1983):
Germany's DTC with France). This conclusion is not affected by differing domestic law
definitions (cf. § 38 I 1 EStG) (BFH BStBl. II 71 (1983)). Further, maintaining a
permanent establishment in the contracting State does not transform a non-resident
enterprise into a resident employer (BFH BStBl. II 513, 515 (1986): Germany's DTC
with France).

[28] Particular problems arise in the context of labour leasing. In these cases a
contract formally only exists between the employee and the leasor, the party hiring-
out. However, the employee is integrated into the operations of the leasing party and
is committed to following this party's instructions. The status of employer is, in other
words, divided between two persons where one is generally resident in the State of
employment while the other is not. This triangular relationship allows for various
planning arrangements with different legal consequences and tax implications (see
OECD, Hiring-out of Labour, paras 6ff.; and para 8 MC Comm. 1992, supra m.no. 4e).
It was therefore considered whether payments for hired-out labour should be
removed entirely from the scope of Art. 15. The OECD Report (para 72) did not
believe this to be an adequate solution (see, however, the Reservations of Germany
and Norway, para 16 MC Comm., supra m.no. 4g). Nevertheless, such provisions are
frequently found in recent treaty practice (see infra m.no. 48). The MC Comm. 1992,
para 8 ultimately recommends an economic evaluation corresponding to the object
and purpose of Art. 15 and sets forth certain criteria according to which the party
hiring-out will, as a rule, be considered to be the employer (thus, e.g., the Danish
Finance Administration, cf. Dik, B.P., 28 ET 48 (1988), and recently also the German
BMF, Letter of 5 January 1994, BStBl. I 11, 12 (1994); differing was BFH BStBl. II 205
(1978) re Germany's DTC with UK; cf. also Betten, R., 40 BIFD 330 (1986); critical,
Lechner, E., supra m.no. 1, 230ff.; Switzerland inserted an observation (para 13 MC
Comm. 1992, supra m.no. 4f), stating that this approach should only be applied in
case of abusive hiring-out arrangements). Nonetheless, it ought to be considered for
the interpretation of Art. 15 (2) (b) whether the party hiring-out should be seen as the
employer under that rule in certain cases when it also actually ‘pays’ the
remuneration, i.e. bears the economic cost (infra m.no. 30; see Kempermann, M.,
DStZ/A 144f. (1982), and examples in Lechner, E., supra m.no. 1, at 233ff.).

[29] According to Art. 15 (2) (b), the employer must not be a ‘resident of the
other State’. The concept of ‘residence’ is defined here as for other MC purposes by
Art. 4 (1) MC, i.e. by the domestic law of the State where the activity is exercised. In
contrast, paragraphs 4 (2) and (3), which determine the residence State for treaty
purposes in cases of double residence, are not applicable in the context of Art. 15 (2)
(b). They could be applied if the employer is a resident not only of the State of
activity, but also of the employee's State of residence simultaneously. However, the

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purpose of the ‘tie-breaker rules’ of Art. 4 (2) and (3) is only to enable the treaty's
distributive rules to apply when there is double residence; the distributive rules, of
course, require that one of the two contracting States can unequivocally be
identified as ‘the’ State of residence, resulting in the other one being ‘the other
contracting State’ (para 1 MC Comm. Art. 4; see, too: Popp, M., 40 DB 2082 (1987);
Schoueri, L.E., Intertax 20 (1993)). Paragraph 5 of the MC Comm. to Art. 4 confirms
that the two provisions shall apply exclusively for this case (unequivocally in the
French version, whereas the English one is ambiguous; see Schoueri, L.E., loc. cit.).
Thus, if the employer has a residence in both contracting States, he is resident in the
State of the activity and the 183-day rule does not apply. This result is corroborated
by the object and purpose of Art. 15 (2) (b) and (c). The basis is the primary
taxation by the State of activity according to Art. 15 (1) Sent. 2. For short-term
stays Art. 15 (2) provides an exception to this rule; this exception will not apply,
however, if the remuneration paid has diminished the profits of an enterprise that is
subject to income taxation by the State of the activity (Schoueri, L.E., loc. cit., at
27ff.; differing is Jann, M., supra m.no. 1, at 206f.). Otherwise, the employee's State
of residence would benefit at the expense of the tax receipts of the State of activity.
Whether this will occur, however, is not influenced by the employer being a resident
of the other contracting State, too. It is true that, conversely, where the activity
exceeds 183 days, the remuneration diminishes the tax receipts of the employer's
State of residence. This, however, is not a valid objection to the argument above (as
Jann, M., supra m.no. 1, at 206, maintains) because Art. 15 is structured so that
taxation by the State of activity is preferred.

[29a] Partnerships, if they are not subject to taxation (i.e., if they are
‘transparent’ for tax purposes), in the context of Art. 15 are ‘resident’ in the State of
their effective management following a similar application of the rules governing
residence of corporations (Flick/Wassermeyer/Wingert/Kempermann, Art. 15, note 48;
Schaumburg, H., supra m.no. 1, at 718). This is confirmed by express provisions in
German DTCs (see infra, m.nos. 44f.).

[30] The employer not resident in the State of activity must have paid the
remuneration or it must have been paid on behalf of the employer. This
restriction ensures that the State of employment retains its right to taxation if the
remuneration paid reduced the profits of one of its tax subjects. That means that the
remuneration is only ‘paid’ by an employer not resident in the State of
employment as meant by para 2 when it bears the economic cost of the payment
(thus, there is also an ‘economic employer’ term in Art. 15 (2), though the conditions
for being the ‘formal employer’ must first be fulfilled, cf. also para 8 MC Comm. 92,
supra m.no. 4e; BFH BStBl. II 4 (1986); II 442 (1986); FG Düsseldorf, 28 EFG 447
(1980): Germany's DTC with Spain; the Agreement of Understanding between
Germany and the UK of 3 December 1985 (confirmed by FinMin Nds. of 23 February
1990, 36 RIW 421 (1990)) which adheres to the formal employer term, does not
consider this factual precondition. It thus contradicts the DTC (which corresponds to
the OECD MC in this regard) and is therefore not binding domestically (misleading is
Gross, E., supra m.no. 1, at 359)). It is irrelevant who actually disburses the payment
to the employee. That a subsidiary bears the economic cost of wages paid by its
parent cannot be assumed without more specific evidence (however, evidently
concluding it does bear the cost is the Danish Landsskatteret, R&R, nt. 11, 215
(1990): DTC Denmark/Germany). The enterprise in the State of employment does not
bear the cost if the money is charged to it as part of the price of a work project (FG
Rheinland-Pfalz, 42 EFG 140 (1994), re Germany's DTC with USA 1954/65). In order to
establish that the enterprise in the residence State bears the costs of remuneration
rather than the one in the State of employment, evidence of a cost-transfer
agreement between the two enterprises concerned must be presented, ruled the

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Australian Administrative Appeals Tribunal, Taxation Division (21 Australian Tax
Reports 3630 (1989-90): Australia's DTC with the USA). The ‘Cyprus construction’,
previously popular in the Netherlands - the employee, who was tax free in the State
of employment was paid via a company in Cyprus in order to ensure tax exemption
under Netherlands law (see 24 ET 160 (1984)) - was ruled to be a sham by
Netherlands case law that then denied the Cypriot company qualification as the
employer (see Vollebregt, H.A., 116 WFR 408 (1987)).

[31] Problems will arise whenever part of the remuneration payable to a person
employed in a State of which he is not a resident is borne in kind (e.g. by the
provision of accomodation, subsistence allowance to cover additional cost of board,
etc.) by an enterprise in the State of employment and where the employer in the
State of residence of that person does not refund such costs to the enterprise in the
State of employment. Such payment in kind is an additional consideration for
services rendered and, therefore, is a wage or salary. However, it is not made by, or
on behalf of, an employer who is not a resident of the State of employment. In this
connection, the following must be distinguished: If the charges involved represent
minor elements of the overall remuneration for the services rendered, they should be
treated in the same way as the latter (Flick/Wassermeyer/Wingert/Kempermann, Art.
15, Anm. 53). However, if such charges are not minor elements of the overall
remuneration, the latter must be divided, so that the actual wage or salary may be
taxable only in the employer's State of residence, while the payment in kind may be
taxable in the State of employment and generally also in the employer's State of
residence. Double taxation must then be avoided under Art. 23 A or B (cf. Thiel, J.,
supra m.no. 1, at 51; a different view advanced by
Flick/Wassermeyer/Wingert/Kempermann, Art. 15, Anm. 53). The situation is similar
for daily allowances which the organs of the European Union pay to member States'
employees for work done within the EU (BMF of 2 May 1994, 76 FR 342 (1994)).

[32] i) The rule that the remuneration must not have been borne by a
permanent establishment or a fixed base which the employer has in the State of
employment is also designed to prevent any impairment of the State of
employment's rights to impose tax. Regarding the terms ‘permanent establishment’
and ‘fixed base’, reference has already been made to Art. 5 and Art. 14, respectively
(supra m.no. 13). Use of the term ‘permanent establishment proviso’ (as by BMF of 2
April 1981, BStBl. I 337 (1981)) should be avoided in connection with the rule laid
down in Art. 15 (2)(c), that term having taken root for a different kind of proviso
applying to Arts. 10 (4), 11 (4) and 12 (3) MC (see supra Pre Arts. 10 to 12, at m.nos.
15ff.). Remuneration for dependent personal services is considered to have been
borne by a permanent establishment or fixed base if it can be claimed as a
deduction for business expenses when calculating the profits to be attributed to the
establishment or base (BFH BStBl. II 819 (1988): Germany's DTC with Switzerland;
BStBl. II 755 (1989): Germany's DTC with Netherlands; see in this context also Art. 7
(2)ff. MC and supra that Article, at m.nos. 57ff.). Whether the permanent
establishment actually bears the cost of remuneration is decisive, not whether it
should have done so or whether the cost could have been attributed to it. The text
offers no support for a parallel to Art. 7 (see New Zealand Court of Appeal,
Commissioner of Inland Revenue v JFP Energy Incorporated, 14 TRNZ 617 (1990): re
New Zealand's DTC with the USA; see also Alston, A., 45 BIFD 214 (1991)). This is
conditional, however, on the personnel in question also being attributable, in
functional respects, to the permanent establishment or fixed base (Gruen, B.R., 40 FR
488 (1985); BFH, 33 RIW 497 (1987): Germany's DTC with Switzerland) and, on the
payments constituting, for the permanent establishment or fixed base,
remuneration for dependent personal services. If, in the hands of the permanent
establishment, they are allowed to be given consideration merely as an inter-

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company charge for supplies, services or executive expenses and general
administrative expenses, the restriction laid down in Art. 15 (2)(c) does not apply
(BFH BStBl. II 819 (1988): Germany's DTC with Switzerland; BMF of 5 January 1994,
BStBl. I 11, 12 (1994)). The same is true if remuneration for services paid by an
enterprise is passed on and charged to an associated enterprise under an
arrangement for sharing general administrative or similar costs.

[33] Consequently, inter-company charges between head office and permanent


establishment are not always sufficient to satisfy the condition of remuneration
having been ‘borne’ within the meaning of MC. An indication that the foreign
permanent establishment ‘bears’ the remuneration might be that it itself settles
accounts directly with the employee sent abroad. It can do so either by paying
the remuneration itself or by arranging for another enterprise to advance the money
(Runge, B., 32 BB 182 (1977)). It makes no difference how the costs involved are
accounted for (FG Düsseldorf, 16 EFG 246 (1968)). Whether the remuneration was
initially paid by the domestic employer and subsequently charged to the foreign
subsidiary is likewise irrelevant (BMF loc. cit.). Monthly accounting is not necessary
(Thiel, J., supra m.no. 1, at 48). The remuneration paid to an employee may also be
attributed to a dissolved permanent establishment. Only those rules governing the
assignment of subsequent income can apply in this case (see Pre Arts. 6-22, at m.no.
6). There must have been an economic connection, however (FG München, 24 EFG
187 (1976)).

[33a] It may be helpful in arriving at a suitable result in cases of uncertainty to


consider the goal of the provision, which is to compensate for tax revenue lost
through the deduction of operating expenses in the State of employment. It seems,
therefore, that the remuneration is to be taxed in the State of employment even
when the permanent establishment bears its costs but the employer is resident in a
third State (also, van den Hurk, H.T.P.M., 119 WFR 1229 (1990); differing, van
Gennep, C.J.A.M., 118 WFR 1179 (1989)). Conversely, the condition laid down in Art.
15 (2)(c) can be taken to have been satisfied, i.e. the remuneration thus being
taxable only in the State of residence, if the enterprise actually maintains in the State
of employment a permanent establishment that bears the remuneration, but where,
by virtue of Art. 8 MC, the permanent establishment's profits are not taxed in the
latter State. The reason is that in such a case, the deduction of the remuneration as
business expenses does not adversely affect the State of the permanent
establishment.

[33b] If an employee takes up his activities with an independent foreign


subsidiary which is not his employer, the question as to who bears the remuneration
is irrelevant, because a subsidiary is not a permanent establishment of its parent
company. The only relevant question in regard to the right to tax is whether or not
the employee's presence in the State of employment totalled 183 days or more. In
this connection it should be observed that even a subsidiary may, in exceptional
circumstances, become a permanent establishment, viz. if it exercises activities
qualifying it as a permanent establishment (cf. supra Art. 5, at m.no. 192). What
should further be noted is that questions may also crop up in regard to the
determination of transfer prices in the relationship between parent company and
subsidiary (see, in that connection, supra Art. 9; and particularly the case of labour
sent abroad: Kratzenberg, H., 29 StBp 205 (1989)). Art. 15 (2)(c) also applies if a
building site or construction or installation project becomes a permanent
establishment on account of its lasting more than 12 months (Art. 5 (3) MC).
Remuneration paid to employees exercising their activities on a building site or
construction or installation project may retrospectively become liable to tax in cases
where such a site or project was originally estimated to last for a short period only,

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but then lasted for more than 12 months.

III. German DTCs

1. Synoptic table re Art. 15 (1) and (2)

[34]

________________________________________________________________________________
DTC MC rule: Principle of place Article m.no.
of work; taxation in State of
residence if activities are
temporary (183 days) and there
are no ties with State of
employment

________________________________________________________________________________
Argentina »MC 15 (1)&(2) 6ff.

Armenia see USSR

Australia »MC 14 (1)&(2) 6ff.; 43

Austria »MC; special arrangement 9 (1)&(2)&(4) 6ff.; 35f.;


regarding the term 'employer', 45
for private pensions and
special

Azerbaijan see USSR arrangements for


partnerships

Bangladesh »MC 15 (1)&(2) 6ff.

Belgium »MC 15 (1)&(2)& 6ff.; 42


(4)

Belorussia see USSR

Bolivia »MC; 'Person' instead of 15 (1)&(2) 6ff.; 35; 36a


'Employer'; Exemption in
residence State of taxation
reserved to State of activity

Bosnia-Herzegovina see Yugoslavia

Brazil »MC 15 (1)&(2) 6ff.; 39

Bulgaria »MC 14 (1)&(2) 6ff.

Canada »MC; restriction for 15 (1)&(2) 6ff.


short-term activities

China »MC 15 (1)&(2) 6ff.

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Costa Rica »MC; Exemption in residence 15 (1)&(2); 6ff.; 35; 47
State if taxation reserved to Prot. para 1
State of activity;
subject-to-tax-clause

Croatia see Yugoslavia

Cyprus »MC 15 (1)&(2) 6ff.

Czech see Czechoslovakia


Republic

Czechoslovakia »MC 15 (1)&(2) 6ff.; 36a

Denmark 1962 »MC; subsidiary taxation at 9 (1)&(2) 6ff.; 38


residence

Denmark (D) »MC; special rule for 15 (1)&(2)& 6ff.; 37


business and hiring out labour (4); 16 (2)
for management

Ecuador »MC; 180-day period 15 (1)&(2) 6ff.

Egypt »MC 15 (1)&(2) 6ff.

Finland »MC 15 (1)&(2) 6ff.

France »MC; special arrangement 13 (1)&(4)& 6ff.; 34a;


regarding the term 'employer' (6)&(7) 35ff.; 41; 50
special rule for employees who
exercise their activities in
the other contracting State
under a contract with an agency
hiring out labour; special
clarifying rule regarding the
term 'dependent personal
services'

Georgia see USSR

Greece »MC XI (2)&(3) 6ff.

Hungary »MC; 'person' instead of 15 (1)&(2) 6ff.; 36a


'employer'

Iceland »MC 15 (1)&(2) 6ff.

India 1959/84 »MC; additional conditions XII (1) to 6ff.; 35f.;


for taxation at residence under (3) 43; 51f.; 54
para 2; special arrangement
regarding the term 'employer'

India (D) »MC 15 (1)&(2) 6ff.

Indonesia »MC 14 (1)&(2) 6ff.

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1977

Indonesia »MC 15 (1)&(2) 6ff.


1990

Iran »MC 15 (1)&(2) 6ff.; 43

Ireland »MC XII (1)&(2) 6ff.; 43; 51;


54

Israel »MC 9 (1)&(2) 6ff.; 43

Italy 1925 Taxation at place of 7 (1) 51; 56


employment

Italy 1989 »MC; special rule for 15 (1)&(2); 6ff.; 34a;


employees who exercise their Prot. para 13 & 50; 57f.
activities in the other 16 (e)
contracting State under a
contract with an agency hiring
out labour; special provision
on the entry into force of that
rule

Ivory Coast »MC 15 (1)&(2) 6ff.; 42

Jamaica »MC 15 (1)&(2) 6ff.; 43

Japan »MC 15 (1)&(2) 6ff.; 43

Kazakhstan see USSR

Kenya »MC 15 (1)&(2) 6ff.

Kirghiz see USSR

Korea »MC; 'person' instead of 14 (1)&(2) 6ff.; 36a;


'employer' 51; 55

Kuwait »MC 15 (1)&(2) 6ff.

Liberia »MC; deviation for 15 (1)&(2) 6ff.; 40


calculating 183 days limit

Luxembourg »MC; special arrangement for 10 (1)&(2) 6ff.; 35f.;


partnerships 45

Macedonia see Yugoslavia

Malaysia »MC; 'person' instead of 14 (1)&(2) 6ff.; 36a;


'employer' 51; 55

Malta »MC 15 (1)&(2) 6ff.

Mauritius »MC 15 (1)&(2) 6ff.; 43

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Mongolia (D) »MC 15 (1)&(2) 6ff.

Mexico »MC; twelve-month period 15 (1)&(2) 6ff.; 40

Moldavia see USSR

Morocco »MC 15 (1)&(2) 6ff.; 42

Namibia »MC; Exemption in residence 15 (1)&(2); 6ff.; 43; 47


State if taxation reserved to Prot. para 1
State of activity;
subject-to-tax-clause

Netherlands »MC; special arrangement 10 (1)&(2) 6ff.; 35; 45


regarding the term 'employer'
and partnerships

New Zealand »MC 15 (1)&(2) 6ff.;43

Norway 1958 »MC; special arrangement for 9 (1)&(2)&(5) 6ff.; 35; 45


partnerships; subsidiary
taxation at residence

Norway 1991 »MC; 12-month period; special 15 (1)&(2); 6ff.; 35; 38;
arrangement regarding the term 20 (5)(a); 40; 50
'employer' and additional Prot. para 5
conditions for taxation at
residence; Special rule for
businesses hiring out labour;
special arrangement for
activities off the coast of the
contracting States

Pakistan »MC; special arrangement XI (1) to (3) 6ff.; 35f.;


1958/70 regarding the term 'employer' 43; 51f.; 54
and additional conditions for
taxation at residence

Pakistan 1994 »MC 15 (1)&(2) 6ff.; 43

Papua New »MC; Exemption in residence 15 (1)&(2) 6ff.; 35; 47


Guinea (D) State if taxation reserved to
State of activity; including
special reimbursments;
additional conditions for
taxation at residence under
para 2(d)

Philippines »MC 15 (1)&(2) 6ff.

Poland »MC 14 (1)&(2) 6ff.; 36a

Portugal »MC 15 (1)&(2) 6ff.

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Romania »MC 13 (1)&(2) 6ff.

Russian see USSR


Federation

Singapore »MC; additional conditions 14 (1)&(2) 6ff.; 36a


for taxation at residence

Slovakia see Czechoslovakia

Slovenia see Yugoslavia

South Africa »MC; additional conditions 13 (1)&(2) 6ff.; 43; 47


for taxation at residence under
para 2

Spain »MC 15 (1)&(2) 6ff.

Sri Lanka »MC 15 (1)&(2) 6ff.; 43

Sweden »MC; special arrangement 14 (1)&(3)& 6ff.


1959/78 regarding the term 'employer' (5)&(6)
and for partnerships

Sweden 1992 »MC; special rule on 15 (1)&(2)& 6ff.


commercially hiring out of (4)
labour

Switzerland »MC; special arrangements for 15 (1)&(2)& 6ff.; 37


senior staff of companies (5)

Tadzhikistan see USSR

Thailand »MC 14 (1)&(2) 6ff.; 36a;


51; 55

Trinidad & »MC 15 (1)&(2) 6ff.


Tobago

Tunisia »MC 15 (1)&(2) 6ff.; 42

Turkey »MC; special arrangement for 15 (1)&(2); 6ff.; 49


consultation in tax matters and 25 (5) Prot.
for temporary employment para 6
business

Turkmenistan see USSR

Ukraine (D) »MC 15 (1)&(2) 6ff.

United Arab »MC 15 (1)&(2) 6ff.


Emirates (D)

United »MC XI (2)&(3) 6ff.; 34a; 43


Kingdom

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Uruguay »MC 15 (1)&(2) 6ff.

USA 1954/65 »MC; additional conditions X (1) to (4) 6ff.; 51;


for taxation at residence 53f.

USA 1989 »MC 15 (1)&(2) 6ff.; 34a

USSR »MC 12 (1)&(2) 6ff.; 46

Uzbekistan see USSR

Venezuela (D) »MC; Exemption in residence 15 (1)&(2) 6ff.


state if taxation reserved to
state of activity

Yugoslavia »MC 16 (1)&(2) 6ff.

Zambia »MC 15 (1)&(2) 6ff.

Zimbabwe »MC 15 (1)&(2) 6ff.; 43

2. Explanatory notes

[34a] a) German domestic law: If Germany is not entitled to taxation under a


DTC, it may not subject wages to either income or withholding taxes. A special
exemption procedure is not necessary (BFH BStBl. II 171 (1987): cf. also FG Rh.-Pfalz,
32 EFG 129 (1984) on the issue of employer liability absent a certificate of
exemption); the taxpayer may apply for a certificate of exemption, and it will
regularly be granted in such cases (LStR Abschn. 123 (1996)). However, if the
exemption from tax is dependent upon an application under a DTC (DTCs with France
1989 (Art. 25b (1)), UK (Art. XVIIIA (4)), Italy 1989 (Art. 29), USA 1989 (Art. 29)), the
domestic employer may only refrain from withholding tax from wages for activity
abroad if a certificate of exemption has been issued by the German fiscal authorities
(LStR Abschn. 123 (1996)). § 50d EStG, implemented by the tax reform law of 1990,
which provides for taxation notwithstanding the provision of a DTC, does not apply to
income from dependent work of a resident; it covers only withholding from
investment income and from income received by non-resident taxpayers (§ 50a
EStG). If tax were withheld, the employee concerned must apply for repayment of the
overpaid taxes in the context of an assessment procedure. A certificate of exemption
is not binding on the assessment of income tax (BFH BStBl. II 500 (1985))

[34b] Income exempt in Germany is, however, subject to a progressivity proviso (§


32b EStG; see Art. 23, at m.nos. 199ff.). Expenses relating to the production of
income which are connected with the foreign activity are to be considered for the
income assessed under the progressivity proviso, particularly when they exceed the
positive income (negative progressivity proviso). The same applies to preliminary
expenses, such as those from submitting applications or acquiring a place to live (FG
Münster of 11 December 1992, 41 EFG 383 (1993); BFH BStBl. II 113 (1994): both
Germany's DTC with South Africa).

[35] b) Most of the old German DTCs (DTCs Austria, Denmark 1962, France, India

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1959/84, Luxembourg, Netherlands, Norway 1958, Pakistan 1958 and Sweden
1959/78) use wording which deviates from the MCs. Accordingly, the State of
residence has the ‘right to taxation’ (Besteuerungsrecht) as long as work is not
performed in the other contracting State; if the latter is the case, ‘the other
contracting State has the right to taxation’. In contrast to the MCs, this wording does
not rely on a provision corresponding to Art. 23 A or B to ensure that double taxation
is avoided, rather the exemption of the remuneration at issue is independently
established. However, this is not that significant since these treaties typically provide
for the exemption in both contracting States. The situation is similar for some more
recent DTCs (DTCs Bolivia, Costa Rica, India (D), and Papua New Guinea (D)), under
which the remuneration shall be taxable only in the State of employment if it cannot
be taxed under Art. 2, as an exception, by the State of residence. Corresponding to
para 6 of the MC Comm. to Art. 23 (infra Art. 23, at m.no. 6), simultaneous taxation
by the two contracting States respectively is, different than under the MCs, already
precluded under Art. 15. (cf. supra Pre Arts. 6 to 22, at m.no. 3)

Under the older DTCs listed above (with the exception of the DTC Denmark 1962),
the State of residence has exclusive taxation if the employee is ‘temporarily’
present in the foreign contracting State for no more than 183 days during a
calendar year (taxable year). This makes it different from the MCs in that the
provision applies only if the employee's aggregate presence is shorter than that
indicated. And it is at all events not applicable if the employee's presence abroad
exceeds a period or periods of 183 days during the first or the immediately following
year (re the DTC with Austria see the clarifying mutual agreement, FinMin NRW of 10
April 1989, 35 RIW 501 (1989)). The DTC with France, as amended by Suppl. Conv.
(D) of 1989, has adopted the wording to MCs.

[35a] c) The DTCs with France and Luxembourg (Prot. para 17) contain a
definition of the term ‘income from dependent services’ which, though not
differing in result from that reached under the DTCs, supports the arguments given
above for a broad interpretation (supra m.no. 14). Under the definition in the DTC
France, included in income, in addition to salaries and wages, are bonuses, other
earnings, as well as all similar benefits which are not paid by public employers. The
DTC Luxembourg further includes tantièmes and reimbursements. The DTC Papua
New Guinea (D) classifies gratuities as income from dependent personal services (see
supra m.no. 16b).

[36] d) The DTCs with Austria, India 1959/84, Norway 1958 and 1991, Pakistan
1958/70 and Sweden 1959/78 attribute exclusive taxation to the employee's State of
residence only if the employer is a resident of the employee's State of
residence. Para 7 of the MC Comm. expressly provides this alternative. As to the
term ‘employer’, see supra m.nos. 27ff. The question whether a permanent
establishment maintained in the employee's State of residence may be an employer
within the meaning of Art. 15 (2)(b) MC arises in connection with the DTCs under
review here in those cases, too, where the head office is a resident of a third State. A
‘resident of the employee's State of residence’ could thereupon only be the
permanent establishment, whereas under the MCs it is sufficient for the employer
not to be a resident of the State of employment. For a long time, the German tax
authorities believed that in such a case, an ‘economic’ approach calls for an
interpretation which includes the permanent establishment in the term ‘employer’
(FinMin NRW of 5 July 1982, 37 BB 1285 (1982), coord.), whilst the French tax
authorities have rejected this view (FinMin NRW, loc. cit., Tz. 3; the French tax
authorities' view is shared by BFH BStBl. II 442 (1986): Germany's DTCs with Sweden
1959/78; 513 (1986): Germany's DTC with France 1959/69; Runge, B., 32 BB 185
(1977); Vogel, H., 33 BB 1024 (1978); Kempermann, M., 70 DStZ/A 143 (1982);

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Neyer, W., 35 DB 1845 (1982); in the meantime, the German as well as the Austrian
tax authorities, have endorsed this view (FinMin NRW of 5 January 1987, 33 RIW 167
(1987); ÖstBMF of 16 March 1992, 2 SWI 102 (1992); now that Germany's DTC with
France has been adapted to the MC in 1989, the question has been settled as far as
that DTC is concerned; see also OFD Ffm. of 14 February 1992, 45 DB 714 (1992)).
This latter opinion should be accepted. It is admittedly too formalistic to arrive at this
result merely by arguing that a permanent establishment cannot be a ‘resident’ (as
Neyer, W., loc. cit., does, whereas Vogel, H., and Kempermann, M., use this argument
merely as one among others). If an enterprise is a resident of a third State and if it
maintains a permanent establishment in the employee's State of residence, the
latter's tax on the permanent establishment's profits is reduced by the remuneration
paid. It would therefore, indeed, be appropriate if, as the German tax authorities
previously thought, the State of residence were compensated by being entitled to
retain taxation of the remuneration. However, Art. 15 makes so clear a distinction
between ‘employer’ and ‘permanent establishment’ that such an interpretation would
not be compatible with the wording of the treaty (as Vogel, H., and Kempermann, M.,
loc. cit., also think).

[36a] The DTCs with Bolivia, Czechoslovakia, Hungary, Korea, Malaysia, Poland,
Singapore and Thailand use the term ‘person’ instead of ‘employer’ in Art. 15 (2) (b).
With regard to partnerships this could lead to results at variance with the MCs, if the
definition of ‘persons’ in these DTCs does not include them (see supra Art. 3, at
m.nos. 17f.). The DTC with Bolivia, for example, does not include associations of
persons in its definition of persons (Art. 3 (1) (b)); thus, partnerships will not be
employers for purposes of Art. 15 of the DTC.

[37] e) The DTC with France, as amended by Suppl. Conv. 1989, clarifies that the
term ‘dependent personal services’ extends to cover also managerial and other
senior staff activities of companies subject to company tax. A special
arrangement for senior staff of companies is contained in Art. 15 (5) of the DTC with
Switzerland which, in all other respects, is in line with the MCs. According to that
arrangement, all remuneration received by directors, managers or authorized
signatories (for an exhaustive listing, see BMF of 18 December 1985, 39 DB 357
(1986) concerning a mutual agreement with Switzerland) in respect of dependent
personal services may be taxed in the State of which the company is a resident,
irrespective of where such services were rendered. This treaty rule is in line with the
former opinion of BFH, viz. that the place of employment of senior staff should be
deemed to be the company's seat (see supra m.no. 19). By virtue of Art. 24 of
Germany's DTC with Switzerland, such remuneration must then be granted
exemption in the other contracting State (FG Rheinland-Pfalz, 34 RIW 751 (1988);
BFH BFH/NV 295 (1993)). There is no taxation by the State of residence if the
activities of the senior staff member concerned comprise nothing but tasks required
to be accomplished outside that State (e.g., directors responsible exclusively for
foreign markets, heads of branch establishments, etc). In such cases, the State of
residence or the State in which the activities are actually performed is entitled to
taxation (RFH RStBl. 417 (1934): Germany's DTC with Italy 1925; 812 (1938); BFH
BStBl. III 441 (1960); both re Germany's DTC with Switzerland; Debatin, H., 25 DB
1939, 2035 (1972)). For cases where the State of seat cannot exercise its right to tax
because the senior staff member concerned neither resides in its territory nor
exercises his activities there, Art. 15 (5) gives the State of residence a subsidiary
right to tax (thus departing from the principle which forbids mere potential double
taxation; cf. supra Introduction, at m.no. 46; and para 34 MC Comm. Art. 23). A
similar special provision is found in Art. 16 (2) of the DTC with Denmark (D) for
persons who earn their income as the manager under commercial law responsible for
a company resident in the other contracting State.

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[38] f) According to Art. 9 (5) of the DTC with Denmark 1962 and the DTC with
Norway 1958, the State of residence may tax the remuneration if, on account of
domestic law, the State of employment must refrain from exercising the right to tax
which it has under the treaty. That provision likewise pierces the principle that mere
potential double taxation should be banned (see the preceding m.no.). In Denmark's
case it takes account of the fact that, at the time when the treaty was signed,
Denmark did not impose any tax on non-resident employees (Korn/Debatin,
Dänemark, p. 66). The new treaties with Denmark (D) and Norway 1991 no longer
include these regulations.

[39] g) Though its wording is identical to that of the MCs, the DTC with Brazil has
a special feature. If the treaty attributes to Brazil the right to tax when it is the State
of employment (e.g., on the account of the 183-day period having been exceeded),
one point to be observed is that Brazilian domestic law provides that remuneration
for personal services received by an individual who is a resident of a foreign State
and who was present in Brazil for more than 183 days, but not more than 12 months,
is subject to tax only to the extent that such remuneration arises from Brazilian
sources. If such remuneration should arise from German sources, there is a case of
double non-taxation, Brazil not being able to make full use of its treaty right to
impose tax (cf. Korn/Debatin, Brasilien, p. 82ff., Administrative agreement on the DTC
with Brazil; Xavier, A., Direito Tributário Internacional do Brasil, 3rd ed., 301ff.
(1994)). The treaty does not contain any clause allowing subsidiary taxation in the
State of residence.

[40] h) Rather than referring, as the OECD MC 1992 does, to a fiscal year in
connection with the calculation of the 183-day time limit, the DTCs with Liberia,
Mexico and Norway 1991 refer to a 12-month period rather than to the fiscal year.
The State of residence retains the right to tax only if the recipient of the
remuneration is present in the State of employment for no more than 183 days
‘during any 12-month period’. This arrangement leads to results that differ from
those under the previous version MCs, whenever the employee is present in the
foreign contracting State from 10 July of one year to 30 June of the following year.
Previously the State of residence would have had the exclusive right to tax in such a
case. Not so under the DTCs mentioned, because the employee would have been
present in the foreign contracting State for more than 183 days in a 12-month period.
All three DTCs, however, do not contain the addition of the OECD MC ‘for a period or
periods not exceeding ... the fiscal year concerned’. This requirement, however,
follows from the context of the treaty; its absence does not mean that there is a real
difference.

[41] Regarding the calculation of the 183-day period under the DTC with France
(as to the latter treaty, see supra m.nos. 35, 36), attention is drawn to a mutual
agreement between the two contracting States (BMF of 20 February 1980, BStBl. I 88
(1980)).

[42] The first sub-paragraph of Art. 15 (2) of each of the DTCs with Belgium, Ivory
Coast, Morocco and Tunisia makes clear that customary interruptions of work should
be included in the count of the 183-day period.

[43] As detailed in m.no. 25, above, the term fiscal year is determined according
to the law of the source State - the State of employment. If the fiscal year of the
source State is different from the calendar year, this discrepancy must be taken into
account. That applies also for the DTC with Australia, which refers to the ‘year of

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income’ for Australia and the ‘assessment period’ for Germany. As far as can be
determined, the following countries have a fiscal year which is not the same as the
calendar year: Australia (1 July-30 June), India (1 April-31 March), Iran (21 March-20
March), Ireland (6 April-5 April), Israel (1 April-31 March), but following the calendar
year after 1993), Japan (1 April-31 March), Mauritius (1 July-30 June), Namibia (1
March-28 February), New Zealand (1 April-31 March), Pakistan (1 July-30 June), Sri
Lanka (1 April-31 March), South Africa (1 March-28 February), UK (6 April-5 April),
Zimbabwe (1 April-31 March). For India the previous year is controlling (see FG
Düsseldorf, 41 DB 1090 (1988)). However, to the extent that the calculation of the
183-day period in a treaty, as under the MCs, is already based on to the calendar
year, differences in fiscal years are insignificant (as with the DTC Japan). The DTC
with Jamaica uses the term ‘assessment year’ which does not lead to any differences
as Jamaica's assessment year corresponds to the calendar year.

[44] i) If the employer is a partnership, the first sentence of Art. 9 (2) of the DTC
with Norway 1958 and Art. 14 (6) of the DTC with Sweden 1959/78 (as to the latter
two treaties, see supra m.nos. 35, 36) expressly stipulates that residence should be
determined by reference to the place of effective management.

[45] j) Art. 9 of the DTC with Austria (as to the latter treaty, see supra m.nos. 35,
36) applies only to remuneration paid by private sector employers. Remuneration
paid by business enterprises operated by public bodies comes under Art. 10
(disputed; para 22 FProt., however, refers to Art. 10: ‘... and other bodies corporate
organized under public law’), a rule which differs from that of the MCs. Again differing
from the MCs, the treaty with Austria provides that there is no tax exemption in the
foreign State of employment if an employee exercises his activities at a
permanent establishment maintained by his employer and situated in that State,
regardless of whether or not that permanent establishment bears the cost of his
remuneration (sub-para 3 of Art. 9 (2) of the DTC with Austria). For cases where the
employer is a partnership, para 3 FProt. stipulates that residence (Wohnsitz) within
the meaning of sub-para 2 of Art. 9 (2) of the DTC with Austria is deemed to be the
place of management. The same rule is contained in para 15 FProt. of the DTC with
Netherlands and para 18 FProt. of the DTC with Luxembourg (as to the latter two
treaties, see supra m.no. 35).

[46] k) Under the heading ‘remuneration for personal services’, Art. 12 of the DTC
with USSR deals with the taxation of wages, salaries and similar remuneration
received by an individual in respect of personal services. The rule applies only to
dependent personal services, a fact which is made clear by para 1 FProt. As a result,
remuneration for independent personal services is classified as business income
dealt with in Art. 5 of the treaty. Although the wording of Art. 12 (1) departs from that
of Art. 15 (1) MC, its substance is the same. Art. 12 (1) of the DTC with USSR should
be understood to mean the following: Remuneration for activities may be taxed in
the State of employment, but only to the extent that the work is performed there.
The phrase ‘may be taxed’ means, as usual, that the State of residence also may tax
the remuneration (see supra Pre Arts. 6 to 22, at m.no. 5). Art. 12 (1) does not
contain any final and conclusive attribution to the State of employment of the right to
tax, because the word ‘only’ refers to ‘work performed’ rather than to ‘contracting
State’.

[47] l) The DTCs with Papua New Guinea (D) and South Africa, which in all
other respects are in line with the MCs, contain a rule in Art. 15 (2) (d) and Art. 13 (2)
which make attribution of taxation to the State of residence dependent on the latter
State being able, under domestic law, to exercise the taxation right it has under the

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treaty. If not, the rule of Art. 13 (1) continues to apply, viz. that both the State of
residence and the State of employment are entitled to tax the remuneration in
question. The outcome in such a case is that the State entitled to taxation is the
State of employment. This arrangement takes account of the fact that, under the
South African tax system, at least, income from sources outside South Africa, as a
rule, remain untaxed, and the arrangement thus prevents double non-taxation which
would otherwise ensue. This arrangement, too, pierces the principle that the treaty
should already avoid ‘potential double taxation’, but does so in direction opposite to
that of the DTCs with Denmark 1962 and Norway 1958 (supra m.no. 38). The DTCs
with Costa Rica (D) and Namibia contain general subject-to-tax clauses for the same
reason, according to which Germany may tax subsidiarily if the other contracting
State does not tax the income under its domestic law.

[48] m) The DTCs with Denmark (D), and Sweden 1992 exclude application of Art.
15 (2) MC to remuneration for personal services made available by enterprises
engaged in the business of labour leasing. In such cases, avoidance of double
taxation must be arranged by means of a special mutual agreement.

[49] The DTC with Turkey likewise contains a specific rule on professional labour
leasing. Paragraph 6 Prot., which refers to Art. 15 of that DTC, clarifies that leased
labourers are deemed to be employees of the hirer and not of the company hiring
them out nor of the intermediary. That corresponds to the view of the OECD MC 1992
(see supra m.no. 28). Another special feature is to be found in Art. 25 (5) of that DTC
which provides that employees exercising their activities in the other contracting
State may seek the aid of officials of their State of residence in settling their tax
affairs (generally in regard to government officials' involvement in DTCs, see infra
Art. 25, at m.nos. 114ff., 133). This rule is designed to take account of the fact that
many Turkish workers employed in Germany are faced with linguistic and technical
problems in attempting to comply with their tax commitments and have in the past
frequently been victims of private individuals who offered their help and then
abusively took advantage of that situation (see, in this connection, Bericht des
Finanzausschusses, BT-Drs. 11/5472). An exchange of notes of 6 July 1989, which
form an integral part of the treaty, contains certain clarifications designed to
overcome certain objections voiced in Germany.

[50] In regard to labour leasing, the DTCs with France (Art. 13 (6) as amended by
Suppl. Conv. 1989), Italy 1989 (para 13 Prot.) and Norway 1991 (para 5 Prot.) provide
that both the employee's State of employment and his State of residence may tax his
remuneration. If the State of residence avails itself of such taxation, it must give
credit for the other State's tax (cf. infra Art. 23, at m.nos. 148ff.). Depending on the
domestic law of the contracting States, both the hirer and the user may be held liable
by the States concerned for payment of the tax.

[51] n) Some of the earlier DTCs deal, in one common provision, with income
from dependent personal services together with that from professional
(independent) personal services (see supra Art. 14, at m.nos. 33ff.). Taxation, as
a rule, follows the place-of-work principle as laid down in the MCs, but the DTCs differ
considerably from the MCs both in regard to wording and in regard to the various
conditions for the attribution of taxation to the State of residence in cases where
employment abroad is no more than temporary.

[52] aa) Regarding the DTCs with India 1959/84 and Pakistan 1958/70, see
supra m.nos. 35f. Moreover, the remuneration paid must not result in a diminution of
taxable income in the State of employment (India 1959/84) or (in the case of

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Pakistan 1958/70) it must be borne by a resident of the employee's State of
residence. The DTC with India 1959/84 further requires that the remuneration must
be subject to tax in the State of residence.

[53] bb) The DTC with USA 1954/65 exempts compensation from labour or
dependent personal services performed outside one contracting State by a natural
person resident in the other contracting State from tax by the first-mentioned State
(Art. X (1) and (3)). If labour or personal services are performed in the first-mentioned
State, compensation therefore is exempt from tax by that State if the natural person
is present there for no more than 183 days, if the services, etc., are performed under
a direct contractual relationship with a natural person or company resident in the
State of residence, and if the contract concerned includes the commitment to pay the
compensation. Furthermore, the compensation must not be borne by a permanent
establishment maintained by the contracting party in the State of employment. The
new DTC with USA 1989 is in line with OECD MC.

[54] cc) No conflict rules dealing with cases of dual residence are contained in
the DTCs with India 1959/84 and Pakistan 1958/70. As a result, those DTCs are not
applicable to such cases. The employee is treated as if he were a resident of a State
with which no DTC had been concluded (Popp, M., 29 DB 2082 (1976)). For German
employees, taxation is then governed by the provisions of the Decree on Activities
Abroad (Auslandstätigkeitserla; see infra m.nos. 90ff.). Nor is any conflict rule dealing
with cases of dual residence contained in the DTCs with Ireland and USA 1954/65
which, however, provide for an elimination of double taxation in accordance with Art.
XXII (2) (b) and Art. XIV (1) (b)(2) by means of allowing a credit (BFH IWB F.3, Gr. 2,
415).

[55] dd) The DTCs with Korea, Malaysia, Singapore and Thailand are in line
with the MCs with the deviations shown supra m.no. 36a - to the extent that they
concern dependent personal services. The DTC with Singapore requires, as a
condition for attributing taxation to the State of residence in cases where activities
are merely temporary, that the State of residence must actually have exercised its
right to tax.

[56] ee) The DTC with Italy 1925, which dates back to the period before the
Second World War, attributes to the State of employment the right to tax
remuneration in respect of dependent personal services, irrespective of the length
of the employee's presence there.

[56a] Under this DTC, remuneration in respect of personal services is taxed only in
the State where the personal services giving rise to the remuneration are exercised.
In the opinion of BFH (BStBl. II 804 (1971)), a resident of Germany is deemed to
exercise his activities in Italy if he performs services there which, in view of the
situation, are not capable of being exercised anywhere else than on the spot.
However, there is nothing in the treaty text to support this view (see supra m.no. 17).
Taxation switches as from the first day of the activities, even if presence in the other
State is extremely short (BFH BStBl. II 804 (1971) for cases where the employee is
present in Italy for more than 10 days; BFH BStBl. II 402 (1983) in respect to official
travel for one to four days; FG Baden-Württemberg, 33 EFG 301 (1985) where the
presence is less than 24 hours; in a ruling regarding a different matter, BFH has in
the meantime confirmed this view: BFH BStBl. II 479, 480 (1986); all rulings re
Germany's DTC with Italy 1925).

[56b] The last requirement by the German tax authorities was a minimum presence

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of 24 hours (BMF of 8 December 1983, BStBl. I 502 (1983)), but they then discarded
this requirement (BMF of 6 May 1985, 40 BB 982 (1985) in view of the ruling by FG
Baden-Württemberg, 33 EFG 301 (1985); cf., in this connection, Hinnekens, L.,
Intertax 229, 233ff. (1988)). The place-of-work principle laid down in that treaty also
applies to pilots flying in the Italian air space since the national territory of a State
extends to cover the air space over it (see infra Art. 28, at m.no. 15). In such a case,
taxation lies with Italy as soon as the pilot flying an inward-bound commercial aircraft
crosses the Italian frontier, and that remains so until the aircraft has left Italian air
space (BFH BStBl. II 319 (1989)). Since the only crucial point is that the activity must
be exercised abroad, the cited ruling considers irrelevant whether the aircraft merely
flies over, or whether its flight is interrupted by its landing within, the national
territory. This view is opposed by Dziadkowski, D., 43 FR 521 (1988) and 43 BB 1594
(1989) who considers that logical reasoning reveals the inapplicability of the ban on
potential double taxation since there is technically no way of actually bringing a tax
claim to bear on a pilot who merely flies over the national territory without landing
within it. One must admit, it is true, that a mere flight over a territory not involving
any stop-over landing hardly creates an economic allegiance and that, therefore, a
restrictive teleological interpretation of the DTC might, to that extent, appear worth
considering (see also infra Art. 28, loc. cit.). As to the splitting of the remuneration,
see supra m.no. 15.

[57] o) However, the new DTC with Italy 1989 is in line with the MCs. In para 16 e
of its Prot. it furthermore contains a special rule on income from dependent personal
services which is designed to take effect as early as from 1 January 1989. Under that
rule, income from dependent personal services within the meaning of Art. 15 (2)
may, contrary to Germany's DTC with Italy 1925, be taxed, as from 1 January 1989, in
the State of residence as well. Double taxation is avoided in such cases by credit
being allowed for the tax imposed in the State of employment against the State of
residence's tax on such income (cf. infra Art. 23, at m.nos. 148ff.). Since the German
constitutional law does not allow retrospective taxation (see infra Arts. 29/30, at
m.no. 19), this clause could, however, not take effect earlier than as from the
beginning of the fiscal year in which the Bundestag approved the DTC in statutory
form, i.e. the Assessment Period 1990 (ZustimmungsG of 10 August 1990, BGBl. II
743 (1990)). The treaty did in fact come into effect only two years later on 27
December 1992; therefore, it is controversial whether the retroactive effect to 1
January 1990 is constitutional, too. The BFH has supported its constitutionality,
however (on the problem and for substantiation, see infra Arts. 29/30, at m.nos. 19,
20a).

[58] Germany's DTC with Italy 1989 contains a further special rule in para 16 d Prot.
read in conjunction with Art. 24 (3)(a). According to that rule, income derived by an
individual in Italy from his rendering dependent personal services is exempt from tax
in Germany if it has actually been subjected to tax in Italy. If not, Germany retains
primary taxation, even in cases where Italy is technically entitled to such taxation by
virtue of Art. 15 (cf. in this connection a similar rule in Germany's DTC with
Singapore, supra m.no. 55).

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