The double taxation treaty or the income tax agreement between Germany and the United States of America was enforced at the beginning of 1990 and its main purpose is to remove the double taxation on the income earned by US and German residents doing business in the other country. The Germany-US double taxation agreement also contains provisions about the prevention of tax evasion. The agreement is also a successful tool for promoting economic cooperation between Germany and the United States and is meant to encourage businessmen to invest in the contracting parties.
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The Germany-US double taxation agreement contains provisions with respect to the taxation of business profits made by German or US companies in the other country. The agreement establishes that companies will only be taxed in the country the company is registered in, unless the company has a permanent establishment in the other country, case in which the permanent establishment’s profits will be taxed in the other country. However, both US and German companies will benefit from tax deduction for research and development expenses. These deductions will apply to all companies no matter the country the expenses are incurred.
With respect to the taxation of dividends in both Germany and the United States, the double taxation agreement provisions that the dividends paid by a company registered in one of the contracting states may be taxed in the other state. However, the dividend tax may also be applied in the company’s home country, case in which double taxation will occur. In this case, the treaty provides that the tax will be levied at a maximum 5% tax rate of the gross amount of the dividends if the recipient owns at least 10% of the voting power in the company paying the dividends. In all other cases, the dividend tax is 15%.
With respect to the capital gains tax, the double taxation treaty signed by Germany and the United States provisions that a German company holding real estate in the United States may be taxed in the United States. The same provision applies to US companies holding real estate in Germany.
The income resulted from rendering personal services by German sole traders in the United States will be exempt from paying the income tax in the United States. US sole traders will benefit from the same treatment in Germany. US and German employees will also be exempt from paying the personal income tax if they are in the other country for 183 days maximum during a calendar year and if the income is paid by a non-resident company.
For additional information about the double taxation treaty with the United States, please contact our German attorneys.
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