Following a taxpayer friendly decision of the BFH in 2007 (see GTLN 3/2008), according to which interest payments from a German partnership to its U.S. partner were exempt from German tax, the German tax rules were amended in the Annual Tax Act 2009 (see GTLN 11/2008). Under the amended rules, expenses for services, interest payments on loans, payments for the use of assets, etc. paid by a partnership to its foreign partners are treated as business income under the applicable tax treaty in inbound and outbound situations. In inbound situations, this leads to the partner’s income being subject to tax in Germany. This law change was to apply to all cases that were still open for review by the tax authorities at the time the amendment was implemented.
In a recently decided case, the tax court of Munich upheld the application of the rule, rejecting various constitutional and tax technical objections raised by a taxpayer. The court held that the U.S. recipient of royalty payments who was a partner in the German partnership that made the payments was subject to tax on this income in Germany because the royalty income was recharacterized as PE profits under German domestic rules. The case is now pending before the BFH.
