At issue before the BFH was whether the nondiscrimination articles of the Germany-U.S. tax treaty or the Friendship, Commerce and Navigation treaty confer the same rights to a U.S. citizen residing in the U.S. who earned income from independent professional services provided in Germany as the basic freedoms in the Treaty on the Functioning of the European Union (TFEU, formerly the EC Treaty) confer in a similar situation to an EU citizen (case reference: I R 63/10).
A U.S. resident partner of a law firm with a branch in Germany earned income from German sources in 2004 that was subject to the minimum tax rate of 25 % at the time. In a case involving a comparable EU situation, the European Court of Justice (ECJ) had decided on 12 June 2003 (case-No C-234/01) that the application of the minimum tax rate to an EU national infringed the freedom to provide services of the EC Treaty (now TFEU).
The BFH rejected the claimant’s argument based on both the tax treaty and the Friendship Treaty. Article 24(1) of the tax treaty prohibits the contracting states from taxing nationals of the other state in a manner more burdensome than it would tax its own nationals in the same circumstances; the taxpayer could not rely on this article because he was discriminated against based on residence, not nationality. In this respect, the BFH did not follow ECJ jurisprudence that provisions referring to the (foreign) residence of a taxpayer constitute hidden discrimination that is prohibited under EU law in the same way as open discrimination on the grounds of nationality.
The BFH also held that the situation did not constitute discrimination within the meaning of article 24(2) of the Germany-U.S. tax treaty, according to which a contracting state may not tax a permanent establishment of an enterprise of the other state less favorably than enterprises of that state carrying on the same activities. Even if the rule also applied to professional services, the entire income of the U.S. taxpayer had to be taken into account when comparing his situation to a domestic taxpayer, which would mean that the comparable German taxpayer would not have been taxed at a higher tax rate.
Nor could the taxpayer rely on the nondiscrimination clause in article XI(1) of the Friendship Treaty because this rule (as in the case of article 24(1) of the tax treaty) refers to discrimination based on nationality.
Finally, the BFH held that the taxpayer could not rely on the most favored nation treatment (MFN) clause in article XI(3) of the Friendship Treaty. Although the minimum tax rate would not have been applicable to a comparable EU taxpayer due to the Gerritse decision, the BFH held that EU cases should be covered by the caveat to the MFN clause in article XI(5) of the Friendship Treaty. This provision allows each contracting state to extend specific tax advantages to nonresidents on the basis of reciprocity. The BFH held that the basic freedoms of the TFEU constitute such benefits on the basis of reciprocity; thus, the MFN clause was not applicable in the case.
By classifying the basic freedoms as specific tax advantages on the basis of reciprocity, the BFH confirms that it is not willing to extend the principles of ECJ case law to U.S. residents under a most favored nation argument. It can therefore be expected that the relevance of the Friendship Treaty in direct tax cases will decrease since it appears that the treaty would not offer any significant additional protection as compared to the Germany-U.S. treaty. However, even though the taxpayer was unable to rely on the tax treaty in the case, the nondiscrimination article in the Germany-U.S. treaty may provide protection in other cases; its implications would have to be analyzed on a case-by-case basis if an argument based on the nondiscrimination clause is to be made.
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