Development of case law on the interpretation of the DTA Germany/Switzerland in 2013

severance payments: No effectiveness of the Consultation Agreement Regulation

In its decision 10 K 2176/11 of 8 October 2013, the Hessian Finance Court took a fundamental position on the effectiveness of the Ordinance on the Implementation of the German-Swiss Consultation Agreement ("KonsVerCHEV") issued on the basis of section 2(2) of the German Tax Code ("AO").

The reason for this was the tax assessment of a severance payment made by a German employer to an employee who had meanwhile moved to Switzerland as a result of the termination of the employment relationship. According to Art. 15, para. 1 DBA, the State of residence - i.e. in the event of a dispute with Switzerland - has the right of taxation, provided the remuneration is not paid for activities which were carried out in the other Contracting State. According to the case law of the Federal Court of Finance ("BFH"), such a reference to the state in which the employment is carried out is missing in the case of severance payments which are paid on the occasion of the termination of employment relationships. In these cases, the severance payments were not made for the (previously exercised) specific job but were paid as compensation for the loss of the job and the associated disadvantages. The right of taxation of severance payments is thus vested in Switzerland as the country of residence.

In the opinion of the court, a right of taxation of the Federal Republic of Germany also does not result from the German-Swiss consultation agreement on the taxation of severance payments of 17 March 2010 (BMF letter of 25 March 2010, BStBl I 2010, 268). The court thus follows the case law of the Federal Court of Finance (e.g. BFH I R 111/08, BStBl II 2010, 387, on the DBA Germany-Switzerland), which denies the binding effect of the agreement. The agreement is contrary to the wording of Article 15, para. 1 DBA. It therefore meant an amendment to the double taxation agreement, which would not be effective without conversion into positive law of equal rank with the agreement (cf. Art. 59 (2) sentence 1 of the German Constitution).

In the opinion of the court, this result is not changed by § 24 para. 1 sentence 2 of the KonsVerCHEV. The KonsVerCHEV was issued on the basis of the new § 2 para. 2 AO and establishes the regulation of the consultation agreement of 17.3.2010 at ordinance level as a legal norm. In terms of content, the Regulation thus contradicts the wording of the DTA, as does the consultation agreement. The Court of First Instance agrees with the interpretation of the literature, according to which not only the consultation agreement, but also a regulation reproducing it must in any event preserve the primacy of the law: "If the regulation is contrary in substance to the wording of the agreement and thus to the agreement itself, it is invalid. It is to be discarded and does not create any binding effect on the courts."

It should be noted that the Finance Court allowed the appeal because of the fundamental importance of the case and that appeal proceedings are now pending (file number BFH I R 79/13). The outcome of these proceedings potentially has an impact on a large number of tax cases, as Germany has implemented corresponding consultation agreement regulations in relation to numerous other countries, such as the USA, Great Britain, France and the Benelux countries.

Holiday bonuses: No commitment due to cross-border commuter handbook

In its ruling VI R 48/12 of 24 September 2013, the Federal Court of Finance (BFH) confirmed that the so-called Cross-border commuters' handbook of the Karlsruhe Regional Tax Office (Oberfinanzdirektion Karlsruhe), as an administrative provision interpreting a norm, does not have the quality of a legal norm and is not binding on the courts. The subject of the dispute were allowances for Sunday, holiday and night work which a Swiss employer had paid a cross-border commuter as a lump sum. § Section 3b of the German Income Tax Act ("EStG") requires that the respective payments be linked to actual Sunday, public holiday and night work. Such a link did not exist for the lump sum payments in the case in dispute, so that no tax exemption was recognised. The plaintiffs unsuccessfully referred to the cross-border commuter handbook, from which they wanted to derive a flat-rate tax exemption in cross-border commuter cases. In the opinion of the Federal Court of Finance, such a claim cannot be derived from the Agreement on the Free Movement of Persons. There is already a lack of less favourable treatment, since a taxpayer employed by a German employer is also subject to the same requirements.

Extended hardship compensation also for Swiss employers

In the proceedings 3 K 2356/12 of 18 April 2013, the FG Baden-Württemberg ruled on the application of the so-called extended hardship compensation in § 46 (5) EStG to taxpayers employed by Swiss employers. The extended hardship compensation is based on the fact that, according to § 46, paragraph 2, no. 1 EStG, no tax assessment is to be carried out if a taxpayer does not earn any taxable income in excess of EUR 410 in addition to wages, where the tax is deducted directly from the wage. Up to an amount of 410 euros, additional income in these cases therefore remains tax-free. If the amount of additional income is just above this exemption limit, § 46, Subsection 5 in conjunction with § Section 70 of the Income Tax Implementing Regulation provides for a hardship compensation amount which may be deducted from taxable income. This amount corresponds to the difference between 820 euros and the taxpayer's supplementary income.

In the dispute proceedings, the plaintiff was domiciled in Germany and was not self-employed in Switzerland. As a cross-border commuter within the meaning of Article 15a DBA, Germany exercised the right of taxation. With regard to the amount of secondary earnings, the plaintiff fell within the scope of the hardship compensation scheme, as his secondary earnings were above EUR 410 but below EUR 820. However, the tax office refused to deduct the corresponding amount because the requirements of Section 46 (5) EStG were not fulfilled. The plaintiff's income from non-self-employment was in fact not income subject to tax deduction from wages - German wage tax is only deducted from wages if the employer is a domestic employer.

However, the FG Baden-Württemberg contradicted the opinion of the tax authorities and applied the extended hardship compensation to this constellation analogously. There is no objective reason not to compensate for hardship if the German tax authorities do not deduct tax from wages solely because the wages are paid by a Swiss employer.

To treat a standby room as an apartment

In decision I R 50/12 of 10 April 2013, the Federal Court of Finance specified the requirements for the existence of a dwelling within the meaning of § 8 AO. The reason was the assessment of an only sporadic use of a rented room in the case of a so-called standby room. The determination of the place of residence is the decisive factor in establishing a tax liability in the respective state and a connecting factor in the distribution of taxation rights in the DTA.

The plaintiff was a Swiss citizen who was employed as a pilot by a German airline and had his operational airport in Germany. According to Article 15, para. 3 DBA, the entire income of a pilot may be taxed at the place where the company has its seat. Thus, if a person is resident in Germany, both the income earned in Germany and the income earned abroad from this activity is likely to be taxed in Germany. The plaintiff's main residence was in Switzerland, in Germany he had a so-called standby room near the airport where he was deployed. This was a furnished room in the cellar floor, which the plaintiff used for an average of three nights a month and paid 50 euros per month for it. The room had neither a private bathroom or sink, nor a refrigerator or cooking facilities. Besides the plaintiff, two other pilots used the room as a standby room. In the basement there were further rooms, which were used by the landlord as well as the bathroom located there. In addition, the room rented by the plaintiff was used by the landlord for family and guest visits in his absence.

The concept of the dwelling in the sense of § 8 AO requires that the premises, according to their size, allow a stay as an at least modest lodging beyond the mere overnight stay. According to the findings of the Finance Court in the first instance (Hessian FG, 3 K 1061/0912 of April 2012), these conditions were met in the case of the room in question, which was 12 to 15 square meters in size. Unlike the lower court, the Federal Court of Finance does not consider it necessary for the existence of an apartment that the plaintiff used the cellar rooms not only for overnight stays - the use alone as an overnight accommodation is sufficient for the determination of residential purposes. A further condition is, however, that the taxpayer is in possession of the apartment. According to this provision, the dwelling must objectively be available to the taxpayer at any time (whenever he/she wishes) as a place to stay and must also subjectively be intended by the taxpayer to be used accordingly - i.e. for a residential stay at any time. This subjective determination, which is in addition to objective suitability, is precisely the difference between simply staying in a flat and residence (see inter alia also BFH judgement of 26 February 1986 II R 200/82, BFH/NV 1987, 301 and judgement of 22 April 1994 III R 22/92, BFHE 174, 523, BStBl II 1994, 887).

In the opinion of the Federal Court of Finance, the fact that the rooms were available at all times is not simply because the landlord used some of them for overnight stays by guests. In this respect, there is a harmlessness limit which is not exceeded if the landlord is to retain the use only in "few and in every respect negligible exceptional cases".

In addition, the right to dispose of the apartment at any time was also to be affirmed if several persons were entitled to joint use of the rooms. However, this is subject to the condition that the individual tenant retains the possibility of residential use even in times of shared use, which is not limited to staying overnight together. Whether or not such sharing is possible depends on the circumstances of the premises, in particular their size, which could not be clarified by the BFH itself.

On the income tax treatment of pension contributions made in Switzerland and benefits provided by pension funds

The tax assessment of pension contributions paid in for an employee as well as of later disbursements from pension schemes such as Swiss pension funds is a constant topic of discussion in the German fiscal courts. The question of the income tax assessment of such payments arises from a national and international perspective and was also the subject of several dispute proceedings in 2013:

Decision VI R 6/11 of the Federal Court of Finance of 24 September 2013 concerns the income tax treatment of employer contributions to a Swiss pension fund for a cross-border commuter to Switzerland. The plaintiff's Swiss employer provided various retirement benefits in favor of the plaintiff. Initially, under mandatory Swiss law, it paid employer contributions to old-age and survivors' insurance and to disability insurance. In addition, it paid contributions to a pension fund for occupational benefits in the event of death, accident and disability on behalf of the plaintiff. While part of the employer's contributions to this pension fund were mandatory due to a public-law insurance relationship (so-called obligatory contribution), the employer also made further contributions due to a private-law insurance contract (so-called superobligatory contribution).

Expenditure by the employer to secure the future of the employee is tax-free in accordance with § 3 no. 62 sentence 1 EStG, provided that the employer is obliged to do so under statutory regulations or under a provision based on statutory authorisation. According to the case law of the Federal Court of Finance, the same applies if the obligation is based on foreign laws. Accordingly, the employer's contributions to old-age and survivors' insurance and to disability insurance as well as the contributions to the pension fund, which were compulsory due to the public-law insurance relationship (so-called compulsory contribution), were tax-free in accordance with § 3 no. 62 sentence 1 EStG. By contrast, the extra-mandatory benefits provided on the basis of a private-law contract are not subject to § 3 no. 62 sentence 1 EStG. These contributions may, however, be tax-exempt on the merits when applying § 3 no. 62 sentence 4 half-sentence 1 EStG. However, half-sentence 2 must be taken into account here, according to which employer's contributions are to be credited on the basis of a legal obligation. If, due to statutory obligations, the contributions paid exceed those paid on a voluntary basis, the latter are therefore not tax-exempt under § 3 no. 62 sentence 4 EStG.

Finally, it should be noted that the tax exemption of the contributions may result from § 3 No. 56 or 63 EStG. However, both standards did not yet apply to the case in question, whose years of dispute were between 1997 and 2001.

The income tax treatment of pension contributions under Swiss law by employees resident in Germany is also the subject of Decision 14 K 160/13 of the FG Baden-Württemberg of 7 August 2013.

Under Section 10(1)(2)(a) EStG, contributions to statutory pension insurance schemes are deductible as special expenses. Contributions to foreign pension institutions are also included if a comparative legal analysis shows that the structure of the foreign institution and the benefits it is required to provide in the event of a pension claim are in line with those of the German statutory pension insurance. According to case law, the decisive structural elements of the German statutory pension insurance are that the contributions to be paid are based on a statutory order, the insurance is compulsory for the group of persons concerned and the benefits are to be provided as benefits of a public law nature. When applying these principles, the Swiss Old Age and Survivors' Insurance and the Pension Foundation as the pension fund of the Swiss employer are social security institutions within the meaning of § 10 para. 1 no. 2 letter a EStG. It is irrelevant in this context that, unlike the German pension insurance system, the pension fund or foundation is financed on a funded basis and not on a pay-as-you-go basis. The method of financing does not preclude treatment as a statutory pension insurance scheme.

Finally, the Federal Court of Finance dealt with the tax treatment of the termination benefit of a Swiss public-law pension fund in its decision X R 33/10 of 23 October 2013, which concerned payments made by the pension fund of the Basel state personnel, of which the German-based plaintiff was a member. After the plaintiff had terminated her employment in Switzerland and left the country permanently, she received a termination benefit in 2005 in the form of a cash payment. According to the case law of the Federal Court of Finance, the right of taxation for this payment is vested in the State of residence, Germany. The pension benefits paid by a Swiss pension fund to a former employee in the Swiss civil service, which are also based on contributions by the employee, are not subject to the fund state principle in accordance with Art. 19 para. 1 DBA. Nor were they to be classified under agreement law as a pension in accordance with Article 18 DBA. The catch-all provision of Article 21 DBA, according to which income not specifically allocated may be taxed by the State of residence, must therefore be applied.

In addition to the classification under treaty law thus decided, the assessment of the termination benefits under German domestic income tax law was also in dispute. Despite individual differences in the structure and the benefits granted compared with the German pension insurance system, the BFH considers that the benefits of the Pensionskasse des Basler Staatspersonal are to be regarded as a benefit of a statutory pension insurance system which is taxable under Section 22 No. 1 sentence 3 letter a double letter aa sentence 3 EStG. The payment in dispute was also a "different service" within the meaning of this provision - irrelevant in that it was a one-off and not a recurring service. Section 3 no. 3 EStG in the version applicable in 2005, according to which lump-sum settlements made on the basis of the statutory pension insurance are tax-free, does not apply. The standard does not restrict the use of domestic providers. However, its application to a lump-sum payment from a corresponding foreign pension insurance scheme was only justified if this foreign lump-sum payment could be qualified as a lump-sum settlement granted by the German statutory pension insurance scheme. That means that the services must be essentially the same and serve the same purpose. That is not the case with a lump-sum payment on definitive departure from the territory of the insurance institution. Under German pension insurance law, lump-sum settlements are only made in exceptional cases in the event of remarriage of widows/widowers. With regard to the reason for the payment and the calculation of its amount, this compensation was not comparable to the capital compensation in dispute. Finally, the Federal Court of Finance confirmed that the tax liability of capital settlements, introduced by the Retirement Income Act without transitional rules, did not violate either the requirement of retroactivity or the principle of the protection of legitimate expectations. However, reduced taxation pursuant to § 34, Subsection 1, in conjunction with para. 2 no. 4 EStG.

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