1Austria: CJEU Recent Case from Austria – Austria / Germany (C-648/15)

Claus Staringer

1. 2Overview

On 12 September 2017, the CJEU handed down its judgment in (C-648/15). This case is rather special: it concerns a dispute over the interpretation of a particular rule in the Austria-Germany tax treaty. This dispute is now resolved by the CJEU’s judgment, the Court having acted, in effect, as an arbitration tribunal. The CJEU was given the competence to do this by the two contracting states in their bilateral tax treaty: when the Austria-Germany tax treaty established arbitration as the ultimate resolution mechanism over tax treaty disputes (in its Article 25 para. 5), the CJEU was explicitly chosen as the (exclusive) court of arbitration.

In this respect, the present case is absolutely unique: since the Austria-Germany tax treaty (which was negotiated around the year 2000), no other bilateral (or multilateral) tax treaty has given the CJEU such a role. For many years, there was no practical experience of any kind of arbitration under the Austria-Germany tax treaty itself. The present case is actually the first case ever for a dispute between the two states to have escalated to the CJEU for arbitration, after an unsuccessful mutual agreement procedure (MAP).

It is not surprising therefore, that several of the issues in case C-648/15, as discussed below, are (at least so far) unchartered territory. In this regard, the CJEU’s judgment has given some answers to what have thus far been open questions. 1 The author has already speculated on some of these answers when discussing the case while it was still pending before the CJEU. 2 Hence, the analysis below provides an opportunity to verify whether the author’s earlier speculations were correct.

2. The Dispute and the CJEU’s Decision

A brief summary of the underlying dispute: 3

The issue in dispute was whether Germany is allowed to levy a withholding tax on certain cross-border interest payments under Article 11 of the Austria-Germany tax treaty. Under the treaty the general rule for allocating taxing rights over cross-border interest payments is that the residence state of the recipient of the interest has the exclusive right to tax such interest. There is in general no right for the source state to levy tax (e.g. by withholding) on the interest payments (Article 11 3para. 1 of the treaty). By way of exception, the source state is however allowed to levy a tax (with no percentage cap) on interest payments on debt instruments which have a profit participation (in the authentic German language: ).

The disputed issue was now whether a particular kind of interest payment is covered by Article 11 para. 2 of the treaty so that the source state (here Germany) may levy a source tax. The relevant facts of the case are as follows: A German issuer has issued profit participation rights (PPR) (in German: ) to Austrian investors. The PPR had a fixed coupon, i.e. payments to investors under the PPR where calculated as a fixed percentage of invested capital. However, interest payments were only due where the issuer had sufficient profits to satisfy the coupon. If not, unpaid coupons were cumulated (i.e. carried forward) until the issuer became profitable enough to pay the accumulated coupons out of his profits.

The core question was therefore whether the PPR described above generated interest payments that could be classified as stemming “”. If this was the case, Germany would be entitled to levy a source tax under Article 11 para. 2 of the treaty, leading to a credit obligation for Austria in respect of such German source tax. Otherwise (i.e. if no “” was found to exist), Germany would not be entitled to levy any source tax and Austria consequently would not face any credit obligation under the treaty.

The CJEU has given a clear answer to this question in its judgment: tit has interpreted Article 11 para. 2 of the Austria-Germany treaty in such way that there is no right for Germany to levy a source tax on a PPR structured in the manner that it was in the present case. In other words, Austria has “won” the case.

Indeed, the outcome of the case is exactly consistent with the argument submitted by Austria in the proceedings: for the Austrian government, it was always very clear that a PPR such as in the case at hand cannot be a “” instrument because it has a fixed coupon (i.e. there is no percentage entitlement in the issuer’s profit). The only “profit related” element in the PPR concerned is that the issuer is not required to make any interest payments in loss years (or less than the full payment in years where profit is not sufficient to meet the full coupon), but is allowed to carry forward the payment obligation into future profitable years. However, this mechanism is not a “”, but at best a “condition of profitability” which is not covered by Article 11 para. 2 of the treaty. 4 The CJEU followed the substance of this argument, i.e. that instruments cannot fall under Article 11 para. 2 of the treaty if they are only , but not .

3. 4The Reasoning of the CJEU

While the CJEU’s ultimate result is, in the author’s view, convincing, the underlying reasoning it has employed to arrive at such result is more difficult to follow.

3.1. The Irrelevance of Domestic Law

The CJEU starts its analysis of the case with a reference to Article 3 para. 2 of the Austria-Germany tax treaty (which corresponds to Article 3 para. 2 of the OECD Model Convention), where it is stated that items not defined in the treaty should be given the meaning they have under the contracting states’ domestic law. 5 This reference to Article 3 para. 2 is unfortunate as it could be seen as an indication that the CJEU indeed has looked, at least as a starting point, into domestic law to get an understanding of the term “” in Art 11 para. 2 of the Austria-Germany tax treaty. However, this creates the wrong impression. The CJEU’s further reasoning clearly shows that in reality it rejects domestic law as the guiding source of interpretation in the present dispute. 6

The CJEU arrives at this result through an elaborated interpretation of Article 25 para. 5 of the Austria-Germany tax treaty, i.e. of the treaty’s arbitration clause. This clause would be ineffective if undefined terms (like “”) were governed by the contracting states’ domestic laws, as different domestic law backgrounds would then necessarily lead to a dispute that it could not resolve. There would simply be two “correct” interpretations of “”, each following a different domestic law concept. This would deprive the arbitration clause of all practical effect. Therefore, the CJEU concludes that Article 11 para. 2 must be interpreted according to the methods of International Law (i.e. the Vienna Convention on the Law of Treaties) by its ordinary meaning, object and purpose. 7

The whole analysis of the CJEU on the “interpretation by domestic or international law...