Introduction to the Law of Double Taxation Conventions

S. 271 The problem of double taxation

1.1 Basics of international law

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States can levy taxes by virtue of their sovereignty. Tax sovereignty, however, is not unlimited. Not all situations can be taxed. There must either be a personal or an objective nexus, or connection, between the taxpayer and the state. With respect to a personal connecting factor, it is sufficient that this exists with respect to the person concerned. Connecting factors for individuals frequently include domicile, residence or citizenship. For legal entities, the factors usually include the place of incorporation and the place of effective management. With regard to an objective connecting factor, it is sufficient that parts of the transaction or activity involve the taxing state or that the object of the action is somehow connected to the taxing state.

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In international law practice, there are no significant limits on the tax sovereignty of states. In designing the domestic personal tax law, the national legislator can even tax situations when, for example, only a “genuine link” exists. It is only when neither the person nor the transaction has any connection with the taxing state that tax cannot be levied.

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