The right to tax carried interest (i.e. the additional share of profits disproportionate to the capital invested) is vested in the country of residence either under Art. 21(1) Double Tax Agreement-USA (“DTA-USA”) (Other Income) or under Art. 13(5) DTA-USA (Capital Gains) if the corresponding income constitutes income from asset management and not income from business activities. In a recent decision, the Schleswig-Holstein Tax Court ruled on the treaty qualification of the carried interest received by a German resident shareholder (the intervenor) of a limited liability company established under the law of the US state of Delaware with its registered office and place of management in the US (the claimant).
The review to determine the taxpayer’s intention at making a profit for income to qualify as business income under Section 17 German Income Tax Act must be with regard to the taxpayer's entire shareholding in the corporation. An isolated analysis based on the single business share sold is not possible. In its current ruling, the Supreme Tax Court also comments on the question of abuse of rights with the intention to create tax losses in a case of increased acquisition costs because of a (paid) premium.
The Supreme Tax Court has held that that the partial charge business income determination of natural person shareholders with a holding of at least 1% also applies to liquidation losses if a liquidation dividend is paid.
The Supreme Tax Court has held that the treaty attribution of the royalty income charged by a US partner is to his US business. Accordingly, it is not taxable in Germany as partnership profits.
