Introduction
In a May 20 2015 judgment (I R 47/14) the Federal Fiscal Court ruled on the taxation of pilots resident in Germany working for an Austrian carrier on board aircraft that are operated internationally.
The Federal Fiscal Court had to decide whether, and if so in what proportion, the salary of a pilot living in Germany must be taxed under the double taxation agreement between Austria and Germany based on either the exemption method or the imputation method.
In the event that the exemption method is applied, the salary would remain tax free according to German taxation principles. As a result, the pilot's wages would not be included in the assessment basis for German income tax. The salary would be used only for the estimation of the tax rate (the progression proviso). However, the wages would be included in the assessment basis for the imputation method, which would be disadvantageous for the taxpayer. The tax would be calculated on this increased basis and then credited to the income tax paid in Austria.
According to the double taxation agreement, dependent work can be taxed by the state in which the employee works. In this event the exemption method applies (Article 23(1)(a) of the double taxation agreement). Nevertheless, the special regulation of Article 15(5) of the double taxation agreement applies to airline pilots. In line with this regulation, salaries for dependent work which is carried out onboard an aircraft operated in international traffic should be taxed in the contracting state where the company's executive management is seated. In this event the imputation method applies (Article 23(1)(b ee) of the double taxation agreement).
The plaintiff was a pilot who lived in Germany and worked onboard an aircraft operated in international traffic, owned by an airline seated in Austria. The wages he was paid were fully taxed in Austria. Further, an unlimited tax liability in Germany applied as his place of residence was in Germany. The German tax office divided the salary based on the proportion of the plaintiff's total working time and his real service hours over German territory (75.6%) as follows:
- A tranche of 24.4% was considered to be tax free and taken into consideration within the calculation of the German tax rate.
- The outstanding tranche of 75.6% was included in the assessment basis and the income tax paid in Austria according to the income tax assessment set.
The plaintiff claimed that with reference to the 75.6%, the tax office should have applied the imputation method instead of the exemption method. He also stated that the use of the imputation method caused a difference in treatment compared to that of other professional categories.
The Federal Fiscal Court rejected the application of the exemption method and found that the application of the imputation method was in accordance with the double taxation agreement. The difference in treatment was justifiable due to the characteristic work onboard an aircraft operated in international traffic.
In addition, the application of the imputation method was in line with the double taxation agreement. According to Article 15(5) of the double taxation agreement, the salary of the pilot living in Germany should have been taxed in Austria as that was the seat of the airline's management. In line with Article 23(1)(b ee) of the double taxation agreement, the imputation method applied to his salary.
According to the Federal Fiscal Court, the non-application of the exemption method regarding the salary of a pilot working onboard an aircraft operated in international traffic did not violate the constitutionally protected principle of equality of taxation (Article 3(1) of the Constitution). It is generally for the legislature to establish regulations for the various types of income covered under the Income Tax Act if the regulations are self-justifying. The reasons for choosing the imputation method for salaries of airline staff operating in international traffic mainly related to the scope of their work. This activity makes a work-related assignment of the taxation system more difficult and is the main reason for the special regulation of Article 15(5) of the double taxation agreement. In respect of the internationally operated traffic of airline staff, there is a concern that this regulation might cause taxation deficits or even double non-taxation. Further, due to early policy negotiations and Germany's negotiation strategy, the common exemption method is still preferred to the imputation method.
For further information on this topic please contact Johannes Stehr or Ulrich Steppler at Arnecke Sibeth Rechtsanwaelte by telephone (+49 69 97 98 85 0) or email ([email protected] or [email protected]). The Arnecke Sibeth website can be accessed at www.arneckesibeth.com.
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