Credit method
The credit method is a method of avoiding or reducing double taxation on foreign income . In addition to the credit method, the second main method for avoiding double taxation is the exemption or exemption method .
The credit method is used both in national tax law as a unilateral regulation and in double taxation agreements . In Germany it is regulated by Section 34c (1 ) EStG .
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According to this method, the foreign tax paid on foreign income is offset against the German tax liability, i.e. the tax to be paid is reduced by this amount. In contrast to this, the foreign income is exempt from tax with the exemption method, so that no German tax is incurred. In the case of income tax , the application-based deduction procedure may be more favorable instead of the crediting procedure : the foreign tax is deducted from the income.
Double taxation agreement
Many countries use the OECD model convention (OECD-MA) as a basis for concluding their double taxation agreements . Article 23 A OECD-MA contains the exemption method and Article 23 B OECD-MA the credit method, which is why these are also referred to as method articles. They complement the legal consequences of the distribution norms. If the distribution norms stipulate that an income may only be taxed in one state, the method articles are not required to avoid double taxation. They are therefore also referred to as complete or exclusive distribution norms. If, on the other hand, it is a question of incomplete or non-exclusive distribution norms , which merely stipulate that one of the contracting states or, if applicable, both of them may tax a certain income or a certain asset, then the respective method article states how double taxation is avoided.
Situation in Germany
requirements
Individuals with unlimited income tax liability who have paid taxes abroad on foreign income ( Section 34d EStG) can offset this against German tax, provided that the tax paid corresponds to German income tax. This possibility of reducing double taxation exists both for income from countries with which Germany does not have a double taxation agreement , as well as for those with which one exists, insofar as this method is provided for in the double taxation agreement.
Maximum impact
In order not to credit the taxpayer with more foreign tax than is due in Germany on the foreign income, a maximum amount must be calculated. The maximum amount is determined from the proportion of foreign income in the taxable income, applied to the German income tax.
- (Foreign income / taxable income) x German tax = maximum amount
Examples
In the following examples, we assume foreign income of € 1000, on which € 300 foreign tax was paid. This income would also trigger German income tax; Depending on how high this tax would be, the credit method or the deduction method may be more favorable. The total burden due to this income is the same in all three cases as the burden if you only paid the higher tax in each case.
Example 1: German tax higher
If the triggered German tax were € 410, it would not be lower than the € 300 paid and this € 300 could be fully credited. The result would be a relief of 300 € on the German tax, and a total burden of 410 €, of which 110 € in Germany. The total burden would thus be identical to a pure burden with the higher, German tax.
Example 2: German tax lower
If the triggered German tax were € 250, it would be lower than the € 300 paid, and this € 300 could only be offset up to € 0, ie you should only offset € 250. The result would be a relief of 250 € on the German tax, and a total burden of 300 €, exclusively abroad. The total burden would therefore be identical to a pure burden with the higher, foreign tax. However, in this case the deduction procedure should be checked, it could possibly offer a better result.
Example 3: no German tax
If no German income tax were triggered, the foreign tax could not be credited at all. The result would be no relief on the German tax, and still a total tax of € 300, exclusively abroad. In this case, too, the total burden would be identical to the foreign tax. However, in this case the deduction procedure should be checked, it could possibly offer a better result.
Situation in Switzerland
In Switzerland, the Federal Council issued the Ordinance on Flat-Rate Tax Credit (SR 672.201) of August 22, 1967, in order to apply the credit method agreed in the double taxation agreement and to credit the tax levied abroad on foreign income.
Individual evidence
- ↑ Madeleine Simonek, in: Zweifel / Beusch / Matteotti (ed.), Commentary on international tax law, Art. 23 A, B OECD-MA N 3
- ↑ Madeleine Simonek, in: Zweifel / Beusch / Matteotti (ed.), Commentary on international tax law, Art. 23 A, B OECD-MA N 1
- ↑ Ordinance on the lump-sum tax credit . The Federal Council of the Swiss Confederation. Retrieved January 11, 2019.
