Double Taxation Treaty Case [Federal Republic of Germany, Financial Court of Baden-Wurttemberg]

Date29 Noviembre 1968
CourtFinance Court (Germany)
Federal Republic of Germany, Financial Court of Baden-Wurttemberg
Double Taxation Treaty Case

International law in general Relation to municipal law Treaties German-Swiss Double Taxation Treat Interpretation of treaty in the event of conflicting provisions of municipal law The law of the Federal Republic of Germany

Treaties Interpretation of treaties Principles and rules of interpretation German-Swiss Double Taxation Treaty Interpretation Purpose and intention of the treaty The law of the Federal Republic of Germany

Summary: The facts:The plaintiff paid sums of money to his employee, X., a resident of the Federal Republic of Germany. X. often travelled to Switzerland on business. The sums were paid as compensation for the premature termination of X.'s contract of employment and also to ensure that X. would not establish any professional competition within the Federal Republic or Switzerland for a period of two years. A dispute arose between the plaintiff and the competent Revenue Board in Germany, the defendant, as to how these sums were to be taxed according to both German and Swiss law and the German-Swiss Double Taxation Treaty.

Held:Only those sums paid to X. as compensation for the early abandonment of his contract of employment were to be considered taxable income. The Court looked to the practical purpose and intention of the treaty.

The following is the text of the judgment of the Court:

The question whether certain income is subject to domestic taxation must be determined in accordance with the Double Taxation Agreement [D.T.A.] concluded between the Federal Republic of Germany and Switzerland. The provisions of this Treaty rank above conflicting domestic law (Debatin, DStZ/A 1966, p. 163). The further question, whether compensation payments made in respect of an early termination of a contract of employment should be considered taxable income, is not expressly dealt with by the D.T.A. Under German law such payments are considered to be continued income, under Article 2 EStG,[1] which is taxable under Article 4 D.T.A. According to the Swiss view, these payments are to be considered separate income, which would be taxable under Article 7

D.T.A. (Locher, DBAS B7). If, as in this case, the different national legal approaches to the matter fail to harmonize, the most suitable solution would be to seek a compromise. But as no compromise procedure has been included in the Treaty, the Court has no alternative but to find an appropriate solution...

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