Tax Treaty Case Law around the Globe 2025

1. Facts of the case

The taxpayers were residents of Germany and partners in a law firm based in the United States. The law firm was organized in the form of an LL.P. which was regarded as a transparent partnership for German tax purposes. It earned most of its profits in the United States, however, parts of it were also earned in permanent establishments located outside of the United States. The partners worked most of their time in the law firm’s German permanent establishment but also worked for a few days at its head office in the United States. Each partner was entitled to a certain percentage of the law firm’s overall profit. It was divided by country so that the German partners received a percentage of the profits attributable to the law firm’s permanent establishments located all around the world.

The German partners exempted the part of the profit attributable to the head office in the United States in their tax declaration. The tax administration, however, also wanted to tax the US profits and did not agree with the tax exemption.

The partners went to court, and the Court of First Instance decided in favour of the taxpayers. It held that the profit participation attributable...