Question

Mr. Smith is a resident of the UK. Last year he sold an apartment in Germany. According to the DTC between UK and Germany income derived from immovable property is taxable in the Contracting State in which the property is situated (Article 6). Besides this, Article 13(1) of the same DTC provides that gains arising on the disposal of immovable property are taxable in the Contracting State in which the property is situated. Finally, Article 23 of the tax treaty regarding the exemption method provides as follows:

‘a) Income and property other than that referred to below in point (b) of this paragraph shall be exempt from the UK taxes referred to in Article 2(3)(b), where that income or property may be taxed in Germany under this convention.

b) Notwithstanding the provisions of points (a) and (b) of this paragraph, UK tax on the part of income which is taxable in UK under this convention may be calculated at the rate of tax corresponding to the total amount of taxable income in accordance with UK tax legislation’.

Due to the sale of the apartment, Mr. Smith acknowledged a loss of 500 000 EUR in his income tax return. He stressed that he did not have any income in Germany form which he could deduct the loss. However, in the UK he had capital gains from the sale of shares of 1.000 000 EUR. The UK Tax Agency did not allow him to deduct the losses, which he sustained on the sale of immovable property in Germany from the income charged to tax in the UK.

                                                                                              

What are the arguments of each party to support their position?

Answer 1

Arguments of each party to support their position are as follows :

UK Tax Agency :

The UK Tax Agency did not allow Mr. smith to deduct the losses, which he sustained on the sale of immovable property in Germany from the income charged to tax in the UK, because the tax agency considers the DTA which states that income or gain arising on sale of property shall be taxable in the contracting state in which the property is situated. Considering the above, the losses suffered by Mr. Smith on account of sale in Germany is eligible to be set-off only against income taxable in germany which is as per the DTA and the tax agency have considered the same and hence disallowed the deduction of losses incurred on account of sale of property in germany against the taxable income in UK.

Mr. Smith :

Mr. Smith has contested that since the loss sustained on account of sale of property in germany and income earned in UK both belongs to him, and since there are incomes in Germany against which the losses could be set-off so he should be allowed to set-off the loss of 500,000 EUR on account of sale of property in germany against the taxable income of 1000,000 EUR earned in the UK. He Followed the priciple of DTA or general taxation laws whichever is more benefiacial to the assessee. Hence, he contested that he should be allowed to set-off the losses.

These are the possible arguments of each party to support their position.