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Withholding Tax in Germany

Double Taxation Treaty

A Double Taxation Treaty (DTT) – correct name: Treaty for the Prevention of Double Taxation – is a treaty under international law between two states in which the question of the extent to which each contracting state is entitled to exercise rights of taxation on the earnings obtained in their sovereign territory is regulated. A DBA should prevent that natural or legal persons pay taxes that earn revenues in both states are taxed in both states –that is, double taxed.

Two standard methods are used to avoid double taxation:

Exemption method (integrating the progressive clause)
Credit method
 

 

 

To the extent that a DBA uses the exemption method, either the income earned in the country of legal residence or country of commercial activity is declared tax exempt. Individual DBAs also provide for exemption of revenues earned abroad from taxation in the country of legal residence. However, they also provide for the revenues earned abroad affecting the progressive tax rate in the country of legal residence.

To the extent that a DBA follows the credit method, the foreign income tax paid abroad is credited to the income tax liability in the country of legal residence, i.e. the tax owed in the country of legal residence is reduced by the amount of tax paid abroad. This procedure provides the greatest possible tax relief in most cases.

Which method applies in the individual case is determined by the applicable DBA existing between the country of legal residence and country of commercial activity
   
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