Amendment of the German-Irish income tax treaty


On January 19, 2021, lawmakers signed amendments to the protocol in the German-Irish income tax treaty. The key points of the amendments are:

  • the introduction of a new provision in targeting treaty abuse;
  • the revision of the permanent establishment standard by introducing the anti-fragmentation rule; and
  • the introduction of a 365-day holding period for the reduction of withholding tax on dividends.

Although the protocol must first be ratified, global businesses need to be aware of the following:

Background to new anti-tax avoidance measures

In 2015, the OECD created an action plan covering 15 points. It provided governments with the domestic and international legal instruments to combat base erosion and profit shifting (BEPS). These included new or reinforced international standards to help countries in tackling BEPS. Their aim was to improve the coherence of international tax rules, to reinforce their focus on economic substance, and to ensure a more transparent tax environment.


At the time, when it came to treaty abuse, a minimum standard was agreed on, which ensured that treaty benefits were (and are) only granted to those who merit them. Moreover, the definition of what constitutes a permanent establishment was modified. One presumes, this was done to better reflect the reality of business. Many of these measures need lawmakers to actually implement them or to amend income tax treaties.


In order to put the new anti-tax avoidance measures in the area of treaty abuse into effect, the OECD created the multilateral instrument (MLI), aimed at easing the implementation of treaty-related anti-BEPS measures. However, Germany will apply the MLI in only around a dozen out of around 100 income tax treaties meaning it will not be used in many important income tax treaties, such as those with the Netherlands, the United Kingdom and Ireland. Instead, Germany intends to amend the income tax treaties with those non-listed countries on a bilateral basis.


For that reason, on January 19, 2021 the amendment protocol to the German-Irish income tax treaty was signed. It will come into force on January 1, 2022 if the instruments of ratification are exchanged this year.

Treaty abuse

In order to prevent treaty abuse, the treaty partners have agreed on the following amendments to the German-Irish income tax treaty. First, it will be amended to include the following preamble:


Intending to eliminate double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Agreement for the indirect benefit of residents of third States);


Moreover, the German-Irish income tax treaty will be amended to include a principal purpose test (the “PPT”). The PPT is stipulated in Article 29A of the new treaty. It targets transactions and arrangements based on subjective criteria. It is not a substance test but refers to the purpose of an arrangement or transaction. The PPT reads as follows:


A benefit under this Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Agreement.”


These amendments are an internationally accepted minimum standard to ensure that treaty benefits are only granted to those who deserve them.

Revision of the PE treaty standard

Germany has decided not to implement most parts of the revised standard for permanent establishments (“PE”). Of all the proposed changes to the PE standard, Germany plans to only make all specific activity exemptions from the PE standard in existing income tax treaties (e.g. maintaining facilities for the display or storage of goods etc.) subject to an overall “preparatory or auxiliary” requirement. While this approach has been adopted for Germany’s income tax treaties, which will be covered by the MLI, it has not been adopted for the amended German-Irish income tax treaty.


Instead, the more-advanced anti-fragmentation rule will be included in paragraph 4.1, a new addition to Article 5 of the German-Irish income tax treaty. Under the new anti-fragmentation rule, the specific activity exemptions from the PE standard are not available to a fixed place of business used or maintained by an enterprise if the same enterprise (or even a closely related enterprise) carries on business activities at either the same place or at another place in the state if:

  • the same or the other place is a PE, or
  • the overall activity resulting from a combination of the activities is not of a preparatory or auxiliary character.

In either case, the activities conducted (by the two enterprises at the same place, or by the same or closely related enterprise at the two places) must also constitute complementary functions that are part of a cohesive business operation.

New minimum holding period for shareholdings

The amendment further introduces a 365-day minimum holding period requirement for

  • the reduction of the withholding tax rate on dividends; and
  • the alienation of shares in “real estate rich companies”.

To qualify for the limited tax rate of 5 per cent on dividends in the subsidiary’s residence country under the amended Article 10 (2) subpara. a) of the German-Irish income tax treaty, the parent company will have to hold a substantial shareholding (i.e. at least 10 per cent of the capital) in its subsidiary throughout a 365-day period. This includes the day of the payment of the dividend.


As a result, it will no longer be sufficient to increase a shareholding shortly before the dividend is paid in order to obtain the reduction of the withholding tax rate on dividends. From a German perspective, the new minimum holding period corresponds to the requirements for the relief from withholding taxes on dividends, as seen under the EU parent-subsidiary directive, and is transposed into domestic tax law.


Nevertheless, exemptions for computing the minimum holding period will apply for changes of ownership resulting from corporate reorganizations such as mergers or divisive reorganizations of either the parent company or the subsidiary. In cases where the minimum holding period requirement is not met, the withholding tax rate will be limited to 15 per cent.


A comparable minimum holding period is introduced into Article 13(4) of the German-Irish income tax treaty. It covers the right to tax gains from the alienation of shares in “real estate rich companies” (see below).

Extension of the right to tax gains from the alienation of shares in “real estate rich companies”

The amendment to the protocol provides further changes to Article 13(4) of the German-Irish income tax treaty by including that the article also covers “comparable interests, such as interests in a partnership or trust”. As a result, the amended article covers corporations, partnerships and trusts whose shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property located in a state. The scope of the article is thus extended significantly. However, the state where the immovable property is located may only tax gains from the alienation of such shares if the minimum holding period is exceeded (see above).

Implications for global businesses

There should not be many situations in practice where the anti-fragmentation rule will apply. However, the magnitude of the anti-fragmentation rule might mean that some activities of global businesses, which arguably benefit from specific activity exemptions across multiple legal entities, might result in some additional taxable profit in Germany or Ireland. Nevertheless, centralized supply chains and the increasing integration of global businesses should be monitored closely. It is quite easy for global enterprises to carry out a business activity which hasn’t been fragmented on purpose, yet could still fall under, and be affected by, the new anti-fragmentation rule. This suggests a potentially high level of compliance burden for global businesses. As a result, it is expected that Irish companies will be increasingly scrutinized in German tax audits, to see whether they have a PE situated in Germany.


Finally, Irish companies with German subsidiaries should carefully consider the minimum holding period when either receiving dividends from, or alienating shares in, their German subsidiary.