Australia’s new tax treaty with Germany

The new double tax agreement between Australia and Germany has now entered into force.

This is the first treaty in Australia which reflects the OECD’s Base Erosion and Profit Sharing (generally known as ‘BEPS’) Project recommendations for tax treaties.  Changes introduced by this treaty will impact current structures and future deals involving German entities. Also, this is likely to be a template for Australia’s treaties into the future.

BEPS recommendations

Features which implement BEPS Project recommendations include:

• The definition of ‘permanent establishment’ has been substantially expanded, with the result that it will be harder for German businesses to carry on activities in Australia without being taxed in Australia. For example, activities of closely related enterprises are to be aggregated in determining whether, together, they constitute a permanent establishment in Australia.
• A ‘Limitation of benefits’ article has been included, to prevent treaty shopping. It is designed to prevent structures which use a German (or Australian) entity in order to take advantage of the terms of the treaty. It does this, broadly, by denying the benefit of the treaty where using the treaty is one of the ‘principal purposes’ of the arrangement or transaction.

Withholding tax

• Interest: Germany joins the list of countries for which there is exemption from Australian interest withholding tax for financial institutions and government entities (making 10 countries in total, including the US and the UK). That is, German banks can lend directly to Australian borrowers without interest withholding tax applying.
• Dividends: Germany joins the list of countries for which there is a participation exemption from Australian dividend withholding tax. That is, German parent companies can receive dividends from Australian subsidiaries free of withholding tax (subject to various conditions, including that the parent must have at least an 80 per cent voting interest). There is also a new 5 per cent dividend withholding tax rate for shareholders with at least a 10 per cent voting interest, and the 15 per cent rate provided for in the current treaty with Germany continues to apply to other German shareholders.
• Royalties: The withholding tax rate on royalty payments made between Australia and Germany has been reduced to 5 per cent.

Application dates

The withholding tax amendments apply for payments made from January 1, 2017. Amendments in respect of fringe benefits tax apply for fringe benefits provided on or after April 1, 2017.  Amendments affecting income tax will have effect from July 1, 2017.

Further information

For information about the implications of the new tax treaty for your business, please contact one of our Australian Taxation (see below).