In the case under consideration, the plaintiff A was a managing director of both a German company as well as, between 2001 and 2005, managing director of a Belgian besloten vennootschap met beperkte aansprakelijkheid (BVBA). A´s activities for the BVBA were performed partly in Belgium and partly in Germany and he kept a residence in both Belgium and Germany.

The local German tax office, after discovering that the Belgian tax authorities only assessed taxes on that part of A´s salary which A received from the BVBA for the activities actually performed in Belgium, assessed taxes on the salary A received from the BVBA which were not covered by the Belgian tax. In a challenge to this assessment brought by A, the tax court held for the plaintiff. The German tax office then appealed to the Federal Fiscal Court which, on March 5, 2008, held that the plaintiff’s salary paid by the BVBA was not taxable in Germany.

Since A kept a residence in Germany, he was subject to unlimited German taxation. Therefore, his worldwide income including the income from the employment for the BVBA was taxable under German law. Because the income originated in Belgium, however, the Double Taxation Convention between Germany and Belgium (hereinafter “DTC Belgium”) had to be taken into account. The Federal Fiscal Court found that the plaintiff was a resident of both Belgium and Germany, that throughout the year A spent more time in Germany, that he started his activities in Belgium without giving up his German residence and that his Belgian activities were limited in time. Therefore, the Court held that the center of A´s life was in Germany and that he was therefore regarded as a German resident for tax purposes.

Article 23 (1) nr. 1 DTC Belgium states that double taxation of a German resident is to be avoided by excluding income which may be taxed in Belgium from the base upon which German tax is imposed. For purposes of determining the applicable tax rate, however, Germany retains the right to take into account items of income excluded under the provisions of the DTC.

The Federal Fiscal Court analyzed the regulations under which Belgium may be granted the right to tax such income. Article 15 DTC provides that employment income may be taxed in a state other than the state of residence if and to the extent that the employment is performed in that other state. In regard to the case in question, this means that A’s income from the activities performed in Germany would not be covered by Belgium’s right to tax and, therefore, Germany could assess taxes on such portion. However, if the plaintiff’s income were to be regarded as employment income of, or similar to, a corporation’s supervisory board member, Belgium would have the right to tax the full amount of such income under Article 16 DTC Belgium.

The Federal Fiscal Court held that A received his salary from a corporation noting that, under Belgian law, the nominal capital of a BVBA is divided into shares similar to the capital stock of a corporation and that a BVBA is regarded as a corporation for tax law even though it is a partnership under civil law.

The Court also ruled that A’s salary was paid for his activities as a managing director and that, although the income of managing directors is not expressly included in the German version of Article 16 DTC Belgium, the French and Dutch versions do include the income of managing directors and therefore the same interpretation should be made in regard to the German version. Therefore, the Court held that, assuming the contracting states wanted to mutually grant the same rights to taxation in all versions of the DTC, the right to tax the income of a corporation’s managing director must be considered income in terms of Article 16 DTC Belgium. Since the DTC Belgium does not include a “subject-to-tax clause”, which states that income taxable in one contracting state will only be excluded from taxation in the other state if such income is subject to tax in the first state, the Court held that A’s Belgian income must be excluded from German taxation.

Under § 50d of the German Income Tax Code, in order to be granted such an exclusion from German taxation in regard to employment income, the taxpayer must verify that the assessed taxes were paid or that the state having the right of taxation waived its right to assess taxes. Additionally, no exclusion is granted if the contracting state applies the rules of a DTC in a way that leads to tax-free or tax-reduced income in that state.

In the case under consideration, Belgium elected not to tax the German portion of the plaintiff’s managing director’s income because of a national guideline to increase the attractiveness of Belgium for managing directors; the tax exemption was not granted because of a different interpretation of the DTC. Therefore, the Court held that Germany did not have the right to assess taxes on the part of the income not taxed by the Belgian authorities.