Double Tax Treaties: How a Treaty Protects Your Company Abroad

An entrepreneur from Munich sets up a company in Cyprus, a consultant from Graz moves to Dubai, an agency from Cologne receives royalties from the USA. In all three cases, two states claim the same income. Whether it ends up being taxed twice is usually decided by a double tax treaty: an agreement under international law that divides the right to tax between the two states. Germany has concluded such treaties with more than 90 states; in a 2024 OECD peer review report, Germany listed 94 treaties in force. As most of them follow the OECD Model Tax Convention, their basic rules can be explained together, as can their limits and the cases in which there is no treaty at all. Anyone planning a company abroad should know these rules and how a treaty protects your company abroad – and where it does not.

What a Double Tax Treaty Does

A double tax treaty does not create new taxes; it limits existing ones. For each type of income, it determines which state may tax it and how the other state avoids a double burden. Most treaties are based on the OECD Model Tax Convention. The articles cited below correspond to the 2017 version; in November 2025 the OECD adopted an update, the full edition of which was published in September 2026. The numbering of the articles cited here is unchanged.

For entrepreneurs, five rules are particularly important: residence (Article 4), permanent establishment (Article 5), business profits (Article 7), dividends (Article 10) and the method for eliminating double taxation (Article 23). As actual treaties differ from the model in the details, the text of the specific treaty is always decisive.

Residence: Which State Counts as the State of Residence

A treaty only protects persons who are resident in one of the two contracting states. If both states claim the same person, Article 4(2) of the Model Convention resolves the conflict in a fixed order: first the permanent home, then the centre of vital interests, then the habitual abode, then nationality and finally a mutual agreement between the authorities. The residence determined in this way decides which state counts as the state of residence and which may only tax as the source state.

For companies, the situation is more difficult. Under Article 4(3) of the 2017 version, the authorities are to reach an agreement in cases of dual residence, taking into account, among other things, the place of effective management and the place of incorporation; without agreement, there is no relief under the treaty. Some treaties contain no rule at all for companies, such as the one between Germany and Bulgaria. A company registered in Bulgaria but managed from Germany can therefore be fully taxable in both states. A worked example for Bulgarian distributions can be found in the article “Dividends from Bulgaria: What Is Left After Tax in Germany and Austria”.

Permanent Establishment: When the Other State May Tax Profits

As a rule, business profits may only be taxed by the state in which the enterprise is resident (Article 7). When may the other state tax profits? Only if the enterprise has a permanent establishment there, and even then only on the profits attributable to that permanent establishment. Under Article 5, a permanent establishment is a fixed place of business through which the business is wholly or partly carried on, such as a place of management, a branch, an office or a workshop. Under the Model Convention, construction sites only count if they last more than twelve months.

A dependent agent can also create a permanent establishment if they habitually conclude contracts for the enterprise or play the principal role in doing so. For founders, this means that anyone who runs their foreign company from a study in Germany may unintentionally create a permanent establishment there, and the state of residence may then tax profits as well.

Dividends: Withholding Tax and Maximum Rates

When a company distributes profits, the state in which it is based often deducts withholding tax. Treaties limit this tax to maximum rates. The Model Convention provides for 5% if a company holds at least 25% of the capital throughout a 365-day period, and 15% in all other cases. Many German treaties grant the lower rate from a holding of just 10%, for example the treaties with Cyprus, Bulgaria and Malta.

Within the EU, the Parent-Subsidiary Directive (2011/96/EU) goes even further: distributions to a parent company holding at least 10% of the capital are exempt from withholding tax at source; member states may require a minimum holding period of up to two years. If, on the other hand, an individual receives the dividend, it is taxed in the state of residence, where the foreign withholding tax is generally credited up to the maximum rate under the treaty. To grant relief abroad, states usually require a certificate of residence, which in Germany is issued by the competent tax office. Conversely, the Federal Central Tax Office (Bundeszentralamt für Steuern) relieves foreign recipients of German withholding tax on investment income (§ 50c EStG).

Exemption or Credit

How double taxation is avoided is governed by Article 23. There are two methods. Under the exemption method (Article 23 A), the state of residence excludes income that the other state may tax from its own tax; it is usually only taken into account for determining the tax rate. Under the credit method (Article 23 B), the state of residence taxes the income itself and deducts the tax paid abroad. Which method applies – exemption or credit – is determined by the treaty in question, often differing by type of income. The trend is towards the credit method: since 1 January 2024, when the amending protocol to the treaty with Germany became applicable, Bulgaria has only granted credit for all income, and Austria has also switched to the credit method in its treaty with the Emirates.

Countries Without a Treaty: The Emirates and Hong Kong

Not all popular countries have a treaty with Germany. The Emirates are the best-known example. The treaty with the United Arab Emirates expired on 31 December 2021; since then, only income from shipping and air transport has been exempt on the basis of reciprocity (§ 49 Abs. 4 EStG). With Hong Kong, there are only agreements for air transport and shipping, not a comprehensive treaty. Austria and Switzerland, by contrast, have valid treaties with the Emirates, and Austria also has one with Hong Kong.

Being without a treaty does not automatically mean double taxation, because Germany credits foreign taxes under certain conditions even without one (§ 34c EStG). What is missing, however, are the protective rules: no tie-breaker rule for two residences, no cap on withholding tax and no mutual agreement procedure. The article “Moving to Dubai: What Germans Need to Know About Tax When Leaving” explains what this means for a move.

Protection Against Abuse: § 50d Abs. 3 EStG and the MLI

A treaty is not a licence for letterbox companies. Two instruments in particular provide protection against abuse. Under § 50d Abs. 3 EStG, a foreign company is not entitled to relief from German withholding tax on investment income or from tax deducted under § 50a EStG to the extent that its shareholders would not themselves be entitled to the relief and the income has no substantial connection with an economic activity of its own. In addition, there is the OECD Multilateral Instrument (MLI), which has been in force in Germany since 1 April 2021. Germany has applied it since 2025 to its treaties with France, Greece, Croatia, Malta, Slovakia, Spain and Hungary, and since 2026 also to those with Japan and the Czech Republic. Among other things, the MLI adds a general anti-abuse clause to these treaties. Some treaties have also been amended directly, such as the treaty with Bulgaria by the 2022 protocol.

Check for a Treaty with Our Tax Treaty Check

Whether there is a treaty between your country of residence and a business location is something you can check in a few seconds with our Tax treaty check on every country page, for example for Cyprus, Malta or Estonia. Typical mistakes concerning residence and management that even the best double tax treaty cannot fix are described in the article “Forming a Company Abroad: Seven Myths Every Founder Should Know”.

Frequently Asked Questions About Double Tax Treaties

Frequently asked questions about double tax treaties, answered briefly:

This article is for general information only and does not replace tax or legal advice. Last reviewed: October 2026.