The following is a report I worked on for a school project. Its purpose was to answer questions about exporting goods to Germany from Canada.
Exporting and Tax Concerns When Exporting Goods from Canada to Germany
To avoid double taxation on Income and “Certain Other Taxes”, Canada and Germany signed an agreement to avoid double taxation and the prevention of fiscal evasion on July 17th 1981. It was replaced by a new updated agreement on March 28, 2002 after many changes in German political economics, mainly the reunification of East and West Germany in 1990 and establishment of the Eurozone in 1999.
Concerning Canadian firms, Article 5 “Permanent Establishment” is of great interest. The way in which a company conducts business will have the greatest effect on which Country’s taxes they will be subject to.
Article 7, paragraph 1 states: “The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on or has carried on business in the other Contracting State through a permanent establishment situated therein. […] the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.”
This means that if the Canadian firm does business in Germany by leasing their intellectual property to a company in Germany who will sell their intellectual property instead of their own – their profits from leasing the intellectual property should all be taxed by Canada.
However there is a caveat which is expressed in Article 12 on Royalties. Paragraph 1 explains that Canada can charge tax on Royalties received from business in the Contracting State (Germany), but paragraph 2 adds that tax can also be charged on royalties in Germany to the limit of 10% of the gross amount of the royalties. These provisions do not apply if the royalties arise through a permanent establishment in Germany in which case the permanent establishment would already be paying German taxes on income attributable to its business transactions in Germany.
Another concern for operating in Germany is trade tax; Article 2 of the taxation agreements states that trade tax (Gewerbesteuer) is covered by the agreement. Trade tax in Germany is regulated by municipalities independently from the federal government. The effective tax rates range from 7% to 17.7% depending on the municipality which can have a serious impact on profits.
To summarize, a German branch of a foreign company’s profits and capital gains are calculated and taxed on the same basis as those of a German resident company. To avoid double taxation when bringing these profits home to Canada, the Agreement between Canada and the Federal Republic of Germany for the avoidance of Double Taxation on Income and Other Taxes is in place.