Germany: Income and Capital Tax Agreement (2013) with The Philippines

Details are now available of the Income and Capital Tax Agreement (2013), signed between Germany and The Philippines on 9 September 2013.

The treaty, which generally follows the OECD Model, was concluded in both German and English and each language has equal authenticity.

According to the treaty, the maximum rates of withholding tax are as follows:

• 15% on dividends in general; however:
  
  If the beneficial owner is a company (other than a partnership) that holds directly one of the following percentages of the capital of the company paying the dividends:
  
  
  • 5% on dividends for a holding of at least 70%;
  • 10% on dividends for a holding of at least 25%;
  
  
• 10% on interest, subject to exceptions; and
• 10% on royalties.

The treaty permits both countries to levy a branch profits tax of up to 10%.

Deviations from the OECD Model include the following:

• Article 4(4) stipulates that a partnership is deemed to be a resident of Germany if its place of effective management is situated in Germany;
  
• A permanent establishment encompasses a building site, a construction, assembly or installation project or supervisory activities in connection therewith, if it lasts more than 6 months (article 5(3)(a)).
  
• A permanent establishment encompasses also the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a contracting state for a period or periods aggregating more than 6 months within any 12-month period (article 5(3)(b)).
  
• Article 7 on business profits generally follows the UN Model (2001).
  
• The treaty contains an article 14 on independent personal services.
  
• Article 8(2) provides that profits from the operation of ships or aircraft in international traffic derived by an enterprise of a contracting state and arising in the other contracting state may be taxed in that other state but the tax so charged shall not exceed the lesser of:
  
  
  • 1.5% of the gross revenues derived from sources in that other state; or
  • The lowest rate that may be imposed by The Philippines on profits of the same kind derived under similar circumstances by a resident of a third state.
  
  
• Article 26 does not contain an arbitration mechanism to resolve disputes.
  
• The treaty does not provide for an article on the assistance in the collection of taxes.

Germany generally provides for the “exemption-with-progression” method to avoid double taxation. However, dividends will be exempt only to the extent that they are distributed by a company resident in the Philippines in which a German company (not a partnership) directly holds at least 10% of the capital and the dividends were not deducted when determining the profits of the company distributing these dividends.

The credit method applies, however, to a number of specifically listed types of income: (i) dividends that are not exempt; (ii) interest; (iii) royalties; (iv) items of income that may be taxed in The Philippines according to paragraph 2 of article 13; (v) directors' fees; (vi) income of artistes and sportsmen; and (vii) business income if the requirements of an activity clause are not met.

The Philippines generally provides for the credit method to avoid double taxation.