General appreciation of the crediting method

The unlimited crediting method follows always to the realization of the capital export neutrality. The result is independent from the question, if in the considerate countries a profit or loss occurs. It can be spoken from a clean method.

Because of fiscal reasons the limited crediting method will be applied mainly in the reality. As long as the tax payments in the state of source are lower than the tax payment in the state of residence, occurs neither for the tax authority nor for the tax payer a difference. Differences occur however the tax payments in the state of residence are lower than the tax payments in the state of source, whether based on a loss situation in the state of residence or a generally lower tax level.

A higher tax level in the state of source does not follow to capital export neutrality on the base of limited crediting. The tax payer has a less favorable position than if he realizes the total income in the state of residence. It results the same outcome than for application of the exemption method with tariff proviso. Therefore the limited crediting method is no clean method; at a rising of a crediting surplus –fiscal motivated- an effective double taxation will not be neutralized.

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Impact of limited crediting on income from different state of source

If income from different states of source met together, the question occurs, how the crediting upper limits should be determined. Mainly the concepts of the per-country-limitation and the overall-limitation face each other. In America you can find also an income based “basket-limitation”.

	At the per-country-limitation the crediting upper limits and therefore the crediting tax for the state of source will be determined separately.
	At the overall-limitation the foreign incomes and the foreign tax amounts (over all states) will be summarized and the crediting upper limit determined.

Regularly the overall-limitation is the better solution for the tax payer, the high taxes in a state of source and the lower taxes in another state of source can be balanced out and therefore a crediting surplus can be avoid possibly. However a loss occurs in the state of source the per-country-limitation results in a better solution for the tax payer.

Improvement possibilities of the limited crediting

As possibilities, to develop the negative impact of the fiscal motivated crediting limitation in a way that it would be at least obviously soften for the tax payer, are discussed:

	A carry forward or backward possibility of crediting surpluses, for example partial practiced in the Netherlands
	A right of choice between the per-country-limitation and the overall-limitation.

Impact of the crediting method under loss constellations

The impact of the crediting method in the context with losses can be mainly denoted as system-compatible:

Domestically losses lead always in connection with the unlimited crediting to capital-export-neutrality, however connected with high tax refunds of the state of residence. The crediting limitation has a negative impact on the application of the limited crediting. Face relative high foreign income (with a respectively high tax burden) to domestic losses, the worldwide income decreases (under the same conditions). Based on the decreasing worldwide income the decreasing domestically tax on the worldwide income has the impact of the limitation of the allowable foreign tax. Thereof results high crediting surplus, which blocks a capital export neutral taxation.

Foreign losses lead to a systematic solution of the configuration of the crediting method: Admittedly a crediting will not take place, because in the foreign country no tax will be raised based on the negative foreign assessment base, but the losses will be adopted into the assessment base by the worldwide income principle and follows therefore to a capital export neutral taxation considering the personal capabilities.

Application in the German tax law

§ 34c paragraph 1 income tax law contains the crediting method as a unilateral rule for lowering the double taxation of foreign incomes. However it is connected with designated conditions:

	It exist (as a rule) a unlimited tax liability
	It exist a tax-subject-identity
	The foreign taxes are count as similar to German tax
	It exist foreign taxes according to § 34d income tax law
	The duty period is equivalent
	The foreign tax ist set, paid and is no subject to a reduction claim anymore

The crediting method is developed with the per-country-limitation as a limited crediting method. The above mentioned modifications of the limited tax liability were not implemented by the German tax law.

The crediting method is used as catching method for exemption in the German DTA.