Tax Treaty Case Law around the Globe 2021

S. 174I. Introduction

In Germany, the international tax treatment of severance payments was disputed for a long time. Both the German tax administration and German jurisprudence were of the opinion that severance payments were covered by Article 15 OECD MC. The tax administration treated a severance payment as compensation for the prior work and applied Article 15(1) second sentence and Article 15(2) OECD MC while the jurisprudence always regarded a severance payment as compensation for the loss of the job and applied Article 15(1) first half of the first sentence. According to the view of the tax administration, the country that had the taxing right for the prior salary should also be entitled to tax the severance payment. According to the view of the jurisprudence, the new residence state had the exclusive taxing over the severance payment.

The tax administration tried to assert its view by concluding several mutual agreements with other countries on the interpretation of the income from employment article in the respective tax treaties. However, the German Bundesfinanzhof regarded these mutual agreements as non-binding for the courts and as contrary to the clear wording of the tax treat...