Tax Treaty Case Law around the Globe 2012

Germany: Interpretation of the Term “Business Income” under an Income Tax Treaty

10.1. Introduction

Germany’s domestic tax law divides income into seven different categories. “Business income” is defined in a very broad way. Income falls within the ambit of “business income” if the activity is exercised in an independent manner, it lasts for a certain period of time, the taxpayer has the goal of making a profit and he advertises his activity on the market. In addition, the activity must neither fall within the ambit of income from agriculture and forestry, nor within the ambit of income from independent personal services. Moreover, income which forms part of other categories of income may be recharacterized as business income if certain conditions are fulfilled.

German domestic tax law contains many of these fictions. For instance, all income earned by a partnership is recharacterized as business income if some part of the income is business income. The same holds true if the general partner of a partnership is a corporation and only this corporation exercises S. 94management functions. All income earned by a corporation is characterized as business income irrespective of the true nature o...