At a primary level, the taxing rights that each country asserts depend on whether the country uses a system of taxation that is residence-based, source-based, or both. In a residence-based tax system, a country will include in its tax base all or part of the income, including income from sources outside that country, of any person (including juridical persons such as corporations) who is considered resident in that jurisdiction. In a source-based tax system, a country will include in its tax base income arising within its tax jurisdiction, irrespective of the residence of the taxpayer. As applied to MNEs, these two bases, often used in conjunction, generally treat each enterprise within the MNE group as a separate entity. OECD member countries have chosen this separate entity approach as the most reasonable means for achieving equitable results and minimising the risk of unrelieved double taxation. Thus, each individual group member is subject to tax on the income arising to it (on a residence or source basis) ...

At a primary level, the taxing rights that each country asserts depend on whether the country uses a system of taxation that is residence-based, source-based, or both. In a residence-based tax system, a country will include in its tax base all or part of the income, including income from sources outside that country, of any person (including juridical persons such as corporations) who is considered resident in that jurisdiction. In a source-based tax system, a country will include in its tax base income arising within its tax jurisdiction, irrespective of the residence of the taxpayer. As applied to MNEs, these two bases, often used in conjunction, generally treat each enterprise within the MNE group as a separate entity. OECD member countries have chosen this separate entity approach as the most reasonable means for achieving equitable results and minimising the risk of unrelieved double taxation. Thus, each individual group member is subject to tax on the income arising to it (on a residence or source basis) ...

In 1964, B KG had waived claims totalling … against B S.A. in France, in which it held an 88% interest. In the course of an audit of B KG’s profits for 1964, the tax authorities did not regard the waiver as a commercial transaction. Instead, they found that the amount waived was a contribution under company law, resulting in additional acquisition costs for the shareholding. A partial write-off of the investment itself was out of the question. B KG’s appeal to the Fiscal Court was dismissed the appeal. The Fiscal Court held that, under Article 5 of the DTC of 21 July 1959 between Germany and France, the reduction in profits resulting from the waiver of the claims could not be taken into account for tax purposes in Germany due to lack of business purpose. B KG appealed against that decision, alleging an infringement of substantive law. Judgment of the Federal Fiscal Court The Court referred the case back to the lower court for reconsideration. The Court held that Article 5 of the then French-German DBA (which is similar in content to Article 9 of the current Model Tax Convention), which allows for an adjustment of taxable profits in favour of one or other Contracting State in the case of a cross-border grouping of enterprises, does not directly create a tax liability. It merely authorises the legislature of each Contracting State to tax profits transferred to the other State under domestic law. With regard to formalities, the Court stated that a judgment of the tax court must contain a clear, complete and self-contained picture of the subject-matter of the dispute, even if it is brief, with emphasis on the submissions of the parties. Where reference is made to pleadings and other documents, they and the subject of the reference must be described with sufficient precision. General references to files and documents are not admissible. Click here for English translation Click here for other translation ...