Preventing Treaty Abuse

I. S. 2Introduction

Double taxation is a taxation principle referring to income taxes that are paid twice on the same source of earned income. Double taxation can be avoided unilaterally if one of the states involved withdraws its tax claim. On behalf of the state of residence, this unilateral move is often achieved pursuant to a method developed under Anglo-American law whereby the state of residence, if it is not simultaneously the source state, allows a credit for the tax levied in the source state up to an amount equal to its own tax charge. In contrast, some countries avoid double taxation unilaterally through exemptions. As a rule, however, unilateral measures are insufficient to avoid double taxation satisfactorily, because they usually are neither comprehensive nor mutually consistent.

Since the end of the nineteenth century, individual states have consequentely entered into bilateral agreements for the avoidance of double taxation. The first tax treaties were concluded in the middle of the nineteenth century primarily among the various states of Germany and the Austro-Hungarian Empire. However, the first “modern” tax treaty is generally considered to be the Austria-Hungary-Pruss...