# 62015CJ0648

JUDGMENT OF THE COURT (Grand Chamber)

12 September 2017 (
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(Article 273 TFEU — Dispute between Member States submitted to the Court under a special agreement between the parties — Taxation — Bilateral convention for the avoidance of double taxation — Taxation of interest from financial instruments — Definition of ‘debt-claims with participation in profits’)

In Case C‐648/15,

APPLICATION pursuant to Article 273 TFEU, lodged on 3 December 2015,

Republic of Austria, represented by C. Pesendorfer, F. Koppensteiner and H. Jirousek, acting as Agents,

Republic of Austria

applicant,

v

Federal Republic of Germany, represented by T. Henze and J. Möller, acting as Agents,

Federal Republic of Germany

defendant,

THE COURT (Grand Chamber),

composed of K. Lenaerts, President, A. Tizzano, Vice-President, R. Silva de Lapuerta, T. von Danwitz and J.L. da Cruz Vilaça, Presidents of Chambers, J. Malenovský, E. Levits, J.-C. Bonichot (Rapporteur), A. Arabadjiev, C. Toader, C.G. Fernlund, C. Vajda, S. Rodin, F. Biltgen and K. Jürimäe, Judges,

Advocate General: P. Mengozzi,

Registrar: K. Malacek, Administrator,

having regard to the written procedure and further to the hearing on 6 December 2016,

after hearing the Opinion of the Advocate General at the sitting on 27 April 2017,

gives the following

Judgment

| 1 | By its application, the Republic of Austria asks the Court to rule on the dispute which has arisen between it and the Federal Republic of Germany concerning the interpretation of Article 11(2) of the Abkommen zwischen der Republik Österreich und der Bundesrepublik Deutschland zur Vermeidung der Doppelbesteuerung auf dem Gebiet der Steuern vom Einkommen und vom Vermögen (Convention between the Republic of Austria and the Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income and capital) of 24 August 2000 (BGBl. III, 182/2002, ‘the Austro-German Convention’) concerning the taxation of the interest from financial instruments (Genussscheine) issued by a company with its seat in the Federal Republic of Germany and held by a company with its seat in the Republic of Austria. |
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1

By its application, the Republic of Austria asks the Court to rule on the dispute which has arisen between it and the Federal Republic of Germany concerning the interpretation of Article 11(2) of the Abkommen zwischen der Republik Österreich und der Bundesrepublik Deutschland zur Vermeidung der Doppelbesteuerung auf dem Gebiet der Steuern vom Einkommen und vom Vermögen (Convention between the Republic of Austria and the Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income and capital) of 24 August 2000 (BGBl. III, 182/2002, ‘the Austro-German Convention’) concerning the taxation of the interest from financial instruments (Genussscheine) issued by a company with its seat in the Federal Republic of Germany and held by a company with its seat in the Republic of Austria.

Genussscheine

Legal context

The Vienna Convention

The Vienna Convention

| 2 | Article 31(1) of the Vienna Convention on the Law of Treaties of 23 May 1969 (United Nations Treaty Series, vol. 1155, p. 331) (‘the Vienna Convention’) reads as follows:
  ‘A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.’ |
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2

Article 31(1) of the Vienna Convention on the Law of Treaties of 23 May 1969 (United Nations Treaty Series, vol. 1155, p. 331) (‘the Vienna Convention’) reads as follows:

‘A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.’

The Austro-German Convention

The Austro-German Convention

| 3 | Article 3(2) of the Austro-German Convention provides:
  ‘As regards the application of the [Austro-German Convention] at any time by a Contracting State, any term or phrase not defined therein shall, unless the context requires a different interpretation, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, the meaning of that term or phrase according to the tax law of that State having priority over its meaning according to other fields of law of that State.’ |
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3

Article 3(2) of the Austro-German Convention provides:

‘As regards the application of the [Austro-German Convention] at any time by a Contracting State, any term or phrase not defined therein shall, unless the context requires a different interpretation, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, the meaning of that term or phrase according to the tax law of that State having priority over its meaning according to other fields of law of that State.’

| 4 | Under Article 11(1) of the Austro-German Convention, income in the form of interest is taxed in the State of residence or establishment of the beneficial owner. This treatment differs from that provided for in Article 10 of the convention for income from dividends, which are, in principle, taxed in the State of their source. |
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4

Under Article 11(1) of the Austro-German Convention, income in the form of interest is taxed in the State of residence or establishment of the beneficial owner. This treatment differs from that provided for in Article 10 of the convention for income from dividends, which are, in principle, taxed in the State of their source.

| 5 | Article 11(2) of the Austro-German Convention provides:
  ‘Income from rights or debt-claims with participation in profits, including income received by a silent partner from his participation as a silent partner or income from profit-participating loans and profit-sharing bonds, may, however, also be taxed in the State Party in which it arises, in accordance with the laws of that State.’ |
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5

Article 11(2) of the Austro-German Convention provides:

‘Income from rights or debt-claims with participation in profits, including income received by a silent partner from his participation as a silent partner or income from profit-participating loans and profit-sharing bonds, may, however, also be taxed in the State Party in which it arises, in accordance with the laws of that State.’

| 6 | In order to avoid double taxation of such income, the two States Parties opted for the ‘offsetting’ method, as defined in Article 23 of the Austro-German Convention, according to which the State of residence or establishment of the beneficiary of the interest is obliged to offset the amount of tax already levied by the source State against the amount of income tax to be levied on that beneficiary. |
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6

In order to avoid double taxation of such income, the two States Parties opted for the ‘offsetting’ method, as defined in Article 23 of the Austro-German Convention, according to which the State of residence or establishment of the beneficiary of the interest is obliged to offset the amount of tax already levied by the source State against the amount of income tax to be levied on that beneficiary.

| 7 | Article 25(1) of the Austro-German Convention provides that any person who considers himself to have been prejudiced by taxation contrary to that convention may initiate a mutual agreement procedure between the competent authorities of the States Parties. |
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7

Article 25(1) of the Austro-German Convention provides that any person who considers himself to have been prejudiced by taxation contrary to that convention may initiate a mutual agreement procedure between the competent authorities of the States Parties.

| 8 | Under Article 25(5) of the Austro-German Convention:
  ‘In the case of difficulties or doubts concerning the interpretation or the application of this convention, for which no solution can be found during a mutual agreement procedure between the competent authorities arranged in accordance with the preceding paragraphs of this article within a period of three years from the initiation of that procedure, the States Parties are obliged, at the request of the person referred to in paragraph 1, to submit the dispute to the Court of Justice [of the European Union] under an arbitration procedure pursuant to Article [273 TFEU].’ |
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8

Under Article 25(5) of the Austro-German Convention:

‘In the case of difficulties or doubts concerning the interpretation or the application of this convention, for which no solution can be found during a mutual agreement procedure between the competent authorities arranged in accordance with the preceding paragraphs of this article within a period of three years from the initiation of that procedure, the States Parties are obliged, at the request of the person referred to in paragraph 1, to submit the dispute to the Court of Justice [of the European Union] under an arbitration procedure pursuant to Article [273 TFEU].’

| 9 | Article 30 of the Austro-German Convention provides that the protocol thereto forms an integral part of that convention. |
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9

Article 30 of the Austro-German Convention provides that the protocol thereto forms an integral part of that convention.

| 10 | Point 16 of that protocol provides that the provisions of the Austro-German Convention, which are worded in accordance with the relevant provisions of the Model Tax Convention on Income and on Capital drawn up by the Organisation for Economic Cooperation and Development (OECD), generally have the same meaning as those in the commentaries on the articles of that model convention. The same point also states that those commentaries are a means of interpreting the Austro-German Convention within the meaning of the Vienna Convention. |
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10

Point 16 of that protocol provides that the provisions of the Austro-German Convention, which are worded in accordance with the relevant provisions of the Model Tax Convention on Income and on Capital drawn up by the Organisation for Economic Cooperation and Development (OECD), generally have the same meaning as those in the commentaries on the articles of that model convention. The same point also states that those commentaries are a means of interpreting the Austro-German Convention within the meaning of the Vienna Convention.

Background to the dispute

| 11 | Between 1996 and 1998, Bank Austria AG, a company with its seat in the Republic of Austria with unlimited tax liability in that Member State, acquired certain certificates from Westdeutsche Landesbank Girozentrale Düsseldorf und Münster, subsequently Landesbank NRW, whose seat is located in the Federal Republic of Germany. |
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11

Between 1996 and 1998, Bank Austria AG, a company with its seat in the Republic of Austria with unlimited tax liability in that Member State, acquired certain certificates from Westdeutsche Landesbank Girozentrale Düsseldorf und Münster, subsequently Landesbank NRW, whose seat is located in the Federal Republic of Germany.

| 12 | The Republic of Austria claims, without contradiction by the Federal Republic of Germany, that the terms of issue of those certificates may be summarised as follows:





  – | the certificates confer entitlement to an annual payment at a fixed percentage of their nominal value; |
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12

The Republic of Austria claims, without contradiction by the Federal Republic of Germany, that the terms of issue of those certificates may be summarised as follows:

–

the certificates confer entitlement to an annual payment at a fixed percentage of their nominal value;

| – | if the annual payment is likely to give rise to an accounting loss, its amount is reduced accordingly; |
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if the annual payment is likely to give rise to an accounting loss, its amount is reduced accordingly;

| – | however, the certificates confer entitlement, during the period of their existence, to payment of arrears over the course of subsequent years, provided that that adjustment does not give rise to an accounting loss; |
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however, the certificates confer entitlement, during the period of their existence, to payment of arrears over the course of subsequent years, provided that that adjustment does not give rise to an accounting loss;

| – | the payment of interest and the payment of arrears have priority over allocation to reserves and payments to guarantors; |
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–

the payment of interest and the payment of arrears have priority over allocation to reserves and payments to guarantors;

| – | the amount of capital made available to the issuer in return for the certificates is reimbursed at the nominal value of those certificates; |
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–

the amount of capital made available to the issuer in return for the certificates is reimbursed at the nominal value of those certificates;

| – | however, if the balance sheet shows a loss, the amount of the claim for reimbursement is reduced accordingly. In that case, too, the difference as compared with the nominal value of the certificate is made up over the course of subsequent years, provided that this does not entail a loss; |
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however, if the balance sheet shows a loss, the amount of the claim for reimbursement is reduced accordingly. In that case, too, the difference as compared with the nominal value of the certificate is made up over the course of subsequent years, provided that this does not entail a loss;

| – | the certificates confer no right to participation in the proceeds from the winding up of the issuing company; and |
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–

the certificates confer no right to participation in the proceeds from the winding up of the issuing company; and

| – | the issuing company has a right to cancel if the certificates no longer give rise to tax deductibility. |
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–

the issuing company has a right to cancel if the certificates no longer give rise to tax deductibility.

| 13 | While it is undisputed that the income from the certificates at issue is interest within the meaning of Article 11 of the Austro-German Convention, and not dividends within the meaning of Article 10 thereof, the Republic of Austria and the Federal Republic of Germany disagree on whether such interest falls under Article 11(1) or Article 11(2) of that convention. More precisely, the Republic of Austria claims that the certificates at issue are not participation in profits within the meaning of Article 11(2) of that convention, whereas the Federal Republic of Germany takes the contrary view. |
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13

While it is undisputed that the income from the certificates at issue is interest within the meaning of Article 11 of the Austro-German Convention, and not dividends within the meaning of Article 10 thereof, the Republic of Austria and the Federal Republic of Germany disagree on whether such interest falls under Article 11(1) or Article 11(2) of that convention. More precisely, the Republic of Austria claims that the certificates at issue are not participation in profits within the meaning of Article 11(2) of that convention, whereas the Federal Republic of Germany takes the contrary view.

| 14 | Those divergent views as to the legal characterisation of the interest received by Bank Austria led the two States to claim the exclusive right to tax that interest, which gave rise to double taxation for that company for the financial years between 2003 and 2009. |
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14

Those divergent views as to the legal characterisation of the interest received by Bank Austria led the two States to claim the exclusive right to tax that interest, which gave rise to double taxation for that company for the financial years between 2003 and 2009.

| 15 | Pursuant to Article 25(1) of the Austro-German Convention, Bank Austria lodged a request to initiate the mutual agreement procedure with the Austrian authorities. That procedure was initiated by the Republic of Austria but ended in an acknowledgement of failure at the end of 2011. |
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15

Pursuant to Article 25(1) of the Austro-German Convention, Bank Austria lodged a request to initiate the mutual agreement procedure with the Austrian authorities. That procedure was initiated by the Republic of Austria but ended in an acknowledgement of failure at the end of 2011.

| 16 | Bank Austria therefore asked the Republic of Austria to bring the dispute before the Court pursuant to Article 25(5) of the Austro-German Convention. |
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16

Bank Austria therefore asked the Republic of Austria to bring the dispute before the Court pursuant to Article 25(5) of the Austro-German Convention.

Forms of order sought by the parties

| 17 | The Republic of Austria claims that the Court should:





  – | rule that the certificates at issue must not be regarded as debt-claims with participation in profits within the meaning of Article 11(2) of the Austro-German Convention and that, consequently, the Republic of Austria, as the State of residence of the beneficial owner, has the exclusive right to tax the interest therefrom; |
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17

The Republic of Austria claims that the Court should:

–

rule that the certificates at issue must not be regarded as debt-claims with participation in profits within the meaning of Article 11(2) of the Austro-German Convention and that, consequently, the Republic of Austria, as the State of residence of the beneficial owner, has the exclusive right to tax the interest therefrom;

| – | hold that the Federal Republic of Germany must therefore refrain from taxing that interest and reimburse the tax already levied on that basis; |
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–

hold that the Federal Republic of Germany must therefore refrain from taxing that interest and reimburse the tax already levied on that basis;

| – | order the Federal Republic of Germany to pay the costs. |
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order the Federal Republic of Germany to pay the costs.

| 18 | The Federal Republic of Germany contends that the Court should:





  – | hold that the certificates at issue must be regarded as debt-claims with participation in profits within the meaning of Article 11(2) of the Austro-German Convention and that, consequently, the Federal Republic of Germany, as the source State of the income, has the exclusive right to tax the interest therefrom; |
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18

The Federal Republic of Germany contends that the Court should:

–

hold that the certificates at issue must be regarded as debt-claims with participation in profits within the meaning of Article 11(2) of the Austro-German Convention and that, consequently, the Federal Republic of Germany, as the source State of the income, has the exclusive right to tax the interest therefrom;

| – | hold that the Republic of Austria must therefore avoid double taxation of that interest and reimburse the tax already levied on that basis; |
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–

hold that the Republic of Austria must therefore avoid double taxation of that interest and reimburse the tax already levied on that basis;

| – | order the Republic of Austria to pay the costs. |
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–

order the Republic of Austria to pay the costs.

The application for settlement of the dispute

Jurisdiction of the Court

| 19 | The application has been brought before the Court pursuant to Article 273 TFEU, under which the Court may rule on ‘any dispute between Member States which relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement between the parties’. |
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19

The application has been brought before the Court pursuant to Article 273 TFEU, under which the Court may rule on ‘any dispute between Member States which relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement between the parties’.

| 20 | That provision makes the jurisdiction of the Court, subject, on the one hand, to the existence of a dispute between Member States, which is beyond doubt in the present case. |
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20

That provision makes the jurisdiction of the Court, subject, on the one hand, to the existence of a dispute between Member States, which is beyond doubt in the present case.

| 21 | The Republic of Austria and the Federal Republic of Germany both claim the exclusive right to tax income relating to financial years in which those two States were members of the European Union. Those concurrent claims led, in so far as concerns the taxable person, to double taxation contrary to the aims of the Austro-German Convention, by which the States Parties to that convention sought specifically to avoid double taxation. Since the mutual agreement procedure provided for by that convention was unsuccessful, the existence of a dispute between Member States within the meaning of Article 273 TFEU must be regarded as established. |
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21

The Republic of Austria and the Federal Republic of Germany both claim the exclusive right to tax income relating to financial years in which those two States were members of the European Union. Those concurrent claims led, in so far as concerns the taxable person, to double taxation contrary to the aims of the Austro-German Convention, by which the States Parties to that convention sought specifically to avoid double taxation. Since the mutual agreement procedure provided for by that convention was unsuccessful, the existence of a dispute between Member States within the meaning of Article 273 TFEU must be regarded as established.

| 22 | The Court’s jurisdiction is, on the other hand, conditional upon the dispute being related to the subject matter of the Treaties. |
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22

The Court’s jurisdiction is, on the other hand, conditional upon the dispute being related to the subject matter of the Treaties.

| 23 | As the Advocate General stated in point 43 of his Opinion, it follows from a comparison of the various language versions of Article 273 TFEU that the phrase ‘related to’ must be understood as a link rather than a requirement that the subject matter be the same. |
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23

As the Advocate General stated in point 43 of his Opinion, it follows from a comparison of the various language versions of Article 273 TFEU that the phrase ‘related to’ must be understood as a link rather than a requirement that the subject matter be the same.

| 24 | That interpretation is supported by a comparison with the faculty, laid down in Article 259 TFEU, for a Member State to bring an action for failure to fulfil obligations against another Member State when it considers that the latter has failed to fulfil one of its obligations under the Treaties themselves. |
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24

That interpretation is supported by a comparison with the faculty, laid down in Article 259 TFEU, for a Member State to bring an action for failure to fulfil obligations against another Member State when it considers that the latter has failed to fulfil one of its obligations under the Treaties themselves.

| 25 | The condition laid down in Article 273 TFEU that the dispute should be related to the subject matter of the treaties is therefore satisfied when it is established that the dispute brought before the Court has an objectively identifiable link with the subject matter of the Treaties. |
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25

The condition laid down in Article 273 TFEU that the dispute should be related to the subject matter of the treaties is therefore satisfied when it is established that the dispute brought before the Court has an objectively identifiable link with the subject matter of the Treaties.

| 26 | That is manifestly so in the present case, in the light of the beneficial effect of the mitigation of double taxation on the functioning of the internal market that the European Union seeks to establish in accordance with Article 3(3) TEU and Article 26 TFEU. As the European Commission observed, in essence, in its communication to the European Parliament, the Council and the European Economic and Social Committee of 11 November 2011, entitled ‘Double Taxation in the Single Market’ (COM(2011) 712 final), the purpose and effect of the conclusion between two Member States of a convention avoiding double taxation is to eliminate or mitigate certain consequences resulting from the uncoordinated exercise of their powers of taxation, which is, by its nature, capable of restricting, discouraging or rendering less attractive the exercise of the freedoms of movement provided for in the TFEU. |
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26

That is manifestly so in the present case, in the light of the beneficial effect of the mitigation of double taxation on the functioning of the internal market that the European Union seeks to establish in accordance with Article 3(3) TEU and Article 26 TFEU. As the European Commission observed, in essence, in its communication to the European Parliament, the Council and the European Economic and Social Committee of 11 November 2011, entitled ‘Double Taxation in the Single Market’ (COM(2011) 712 final), the purpose and effect of the conclusion between two Member States of a convention avoiding double taxation is to eliminate or mitigate certain consequences resulting from the uncoordinated exercise of their powers of taxation, which is, by its nature, capable of restricting, discouraging or rendering less attractive the exercise of the freedoms of movement provided for in the TFEU.

| 27 | Lastly, the Court has jurisdiction to rule on an application under Article 273 TFEU only if it is submitted to the Court under a special agreement between the parties. |
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27

Lastly, the Court has jurisdiction to rule on an application under Article 273 TFEU only if it is submitted to the Court under a special agreement between the parties.

| 28 | It is true that this application was not lodged pursuant to an arbitration clause specifically adopted with a view to resolving the dispute, but pursuant to a general term of the Austro-German Convention, namely, Article 25(5) thereof, before that dispute arose, by which the States Parties undertook to bring before the Court all difficulties which could arise concerning the interpretation or the application of that convention not resolved by amicable agreement. |
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28

It is true that this application was not lodged pursuant to an arbitration clause specifically adopted with a view to resolving the dispute, but pursuant to a general term of the Austro-German Convention, namely, Article 25(5) thereof, before that dispute arose, by which the States Parties undertook to bring before the Court all difficulties which could arise concerning the interpretation or the application of that convention not resolved by amicable agreement.

| 29 | However, in the light of the objective pursued by Article 273 TFEU, which consists in affording the Member States a means of resolving those of their disputes which relate to the subject matter of the Treaties within the framework of the EU judicature, there is no reason for the parties not to acknowledge, before a dispute arises, an agreement on the referral to the Court of any potential dispute in predefined circumstances in a provision such as Article 25(5) of the Austro-German Convention (see, to that effect, judgment of 27 November 2012, Pringle, C-370/12, EU:C:2012:756, paragraph 172). |
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29

However, in the light of the objective pursued by Article 273 TFEU, which consists in affording the Member States a means of resolving those of their disputes which relate to the subject matter of the Treaties within the framework of the EU judicature, there is no reason for the parties not to acknowledge, before a dispute arises, an agreement on the referral to the Court of any potential dispute in predefined circumstances in a provision such as Article 25(5) of the Austro-German Convention (see, to that effect, judgment of 27 November 2012, Pringle, C-370/12, EU:C:2012:756, paragraph 172).

| 30 | The Court has therefore jurisdiction to rule on this dispute. |
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30

The Court has therefore jurisdiction to rule on this dispute.

Substance

| 31 | The dispute turns on the question whether the concept of ‘debt-claims with participation in profits’ referred to in Article 11(2) of the Austro-German Convention must be interpreted as including certificates such as those at issue in the present case. |
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31

The dispute turns on the question whether the concept of ‘debt-claims with participation in profits’ referred to in Article 11(2) of the Austro-German Convention must be interpreted as including certificates such as those at issue in the present case.

| 32 | The Court notes in that regard that such certificates may be regarded as a particular class of debt. According to their terms of issue, those certificates are remunerated by interest at a fixed percentage of their nominal value. Nevertheless, the particularity of the certificates is, in essence, that the payment of interest is limited, or even suspended, if, as a result of such payment, the issuing company would end its financial year with a loss, with an adjustment being made subsequently to include the arrears when that company returns to profitability, provided that such an adjustment does not cause any loss. |
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32

The Court notes in that regard that such certificates may be regarded as a particular class of debt. According to their terms of issue, those certificates are remunerated by interest at a fixed percentage of their nominal value. Nevertheless, the particularity of the certificates is, in essence, that the payment of interest is limited, or even suspended, if, as a result of such payment, the issuing company would end its financial year with a loss, with an adjustment being made subsequently to include the arrears when that company returns to profitability, provided that such an adjustment does not cause any loss.

| 33 | In order to settle the dispute, it must therefore be ascertained whether the form of remuneration of those certificates may be regarded as characteristic of ‘participation in profits’ within the meaning of Article 11(2) of the Austro-German Convention, a concept not defined by that convention. |
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33

In order to settle the dispute, it must therefore be ascertained whether the form of remuneration of those certificates may be regarded as characteristic of ‘participation in profits’ within the meaning of Article 11(2) of the Austro-German Convention, a concept not defined by that convention.

| 34 | In that regard, the Federal Republic of Germany relies on the interpretation of the concept under its national law, in particular on a judgment of the Bundesfinanzhof (Federal Finance Court, Germany) of 26 August 2010, according to which the remuneration from the certificates at issue is to be regarded as participation in profits. |
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34

In that regard, the Federal Republic of Germany relies on the interpretation of the concept under its national law, in particular on a judgment of the Bundesfinanzhof (Federal Finance Court, Germany) of 26 August 2010, according to which the remuneration from the certificates at issue is to be regarded as participation in profits.

| 35 | Indeed, Article 3(2) of the Austro-German Convention sets out a rule of interpretation according to which a term or phrase not defined by that convention must be given the meaning it has under the tax law of the State applying it. |
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35

Indeed, Article 3(2) of the Austro-German Convention sets out a rule of interpretation according to which a term or phrase not defined by that convention must be given the meaning it has under the tax law of the State applying it.

| 36 | Nevertheless, such a rule of interpretation by a single State at a given point in time is not to be regarded as a rule intended to arbitrate between divergences of interpretation between the two States Parties. |
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36

Nevertheless, such a rule of interpretation by a single State at a given point in time is not to be regarded as a rule intended to arbitrate between divergences of interpretation between the two States Parties.

| 37 | A construction to the contrary would, furthermore, deprive of all practical effect the provisions of Article 25(5) of that convention, whose mutual agreement procedure and clause conferring jurisdiction on the Court would have scarcely any meaning if the States Parties had intended that convention to be interpreted only by reference to national laws alone, even when, as in the present case, those laws have diametrically opposed implications. |
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37

A construction to the contrary would, furthermore, deprive of all practical effect the provisions of Article 25(5) of that convention, whose mutual agreement procedure and clause conferring jurisdiction on the Court would have scarcely any meaning if the States Parties had intended that convention to be interpreted only by reference to national laws alone, even when, as in the present case, those laws have diametrically opposed implications.

| 38 | The concept of ‘debt-claims with participation in profits’, for the purpose of the Austro-German Convention must, therefore, be interpreted according to the methods proper to international law. |
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38

The concept of ‘debt-claims with participation in profits’, for the purpose of the Austro-German Convention must, therefore, be interpreted according to the methods proper to international law.

| 39 | In that regard, it should be borne in mind that it follows from the provisions of the Vienna Convention, to which both the Republic of Austria and the Federal Republic of Germany are parties, that a treaty must be interpreted in good faith in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose, taking into account any relevant rules of international law applicable in the relations between the parties to that treaty (see, to that effect, judgment of 25 February 2010, Brita, C‐386/08, EU:C:2010:91, paragraph 43). |
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39

In that regard, it should be borne in mind that it follows from the provisions of the Vienna Convention, to which both the Republic of Austria and the Federal Republic of Germany are parties, that a treaty must be interpreted in good faith in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose, taking into account any relevant rules of international law applicable in the relations between the parties to that treaty (see, to that effect, judgment of 25 February 2010, Brita, C‐386/08, EU:C:2010:91, paragraph 43).

| 40 | As regards, first of all, the ordinary meaning to be given to the terms ‘participation in profits’, both everyday language and the most commonly accepted accounting conventions refer to an acceptance which implies, in principle, the object of receiving a share in the positive income of the annual operations of an undertaking. That is generally the case of a shareholder but also, in particular, of an employee whose employment contract provides for a bonus representing a proportion of the profits realised by the employer. |
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40

As regards, first of all, the ordinary meaning to be given to the terms ‘participation in profits’, both everyday language and the most commonly accepted accounting conventions refer to an acceptance which implies, in principle, the object of receiving a share in the positive income of the annual operations of an undertaking. That is generally the case of a shareholder but also, in particular, of an employee whose employment contract provides for a bonus representing a proportion of the profits realised by the employer.

| 41 | Furthermore, the phrase ‘participation in profits’ is normally associated with the inherent variability and unpredictability of the annual income of any high-risk economic activity. Thus, participation in the profits of a financial year generally implies the right to receive an amount that is uncertain at the beginning of the financial year, that is liable to vary from one year to another and is indeed capable of being zero. |
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41

Furthermore, the phrase ‘participation in profits’ is normally associated with the inherent variability and unpredictability of the annual income of any high-risk economic activity. Thus, participation in the profits of a financial year generally implies the right to receive an amount that is uncertain at the beginning of the financial year, that is liable to vary from one year to another and is indeed capable of being zero.

| 42 | The phrase ‘debt-claims with participation in profits’ therefore refers to financial products the remuneration of which varies, at least partially, according to the debtor’s annual profits. |
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42

The phrase ‘debt-claims with participation in profits’ therefore refers to financial products the remuneration of which varies, at least partially, according to the debtor’s annual profits.

| 43 | Such an interpretation is borne out by a contextual and purposive analysis of the provisions in which ‘debt-claims with participation in profits’ appears, which is the concept at the heart of this dispute. |
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43

Such an interpretation is borne out by a contextual and purposive analysis of the provisions in which ‘debt-claims with participation in profits’ appears, which is the concept at the heart of this dispute.

| 44 | Next, as regards context, it should be noted that that concept appears in Article 11(2) of the Austro-German Convention before a list intended to illustrate its meaning, which includes three types of financial instrument the common characteristic of which is, as the Advocate General noted in points 94 to 97 of his Opinion, that their remuneration is supposed to vary according to the annual profits of the issuer. |
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44

Next, as regards context, it should be noted that that concept appears in Article 11(2) of the Austro-German Convention before a list intended to illustrate its meaning, which includes three types of financial instrument the common characteristic of which is, as the Advocate General noted in points 94 to 97 of his Opinion, that their remuneration is supposed to vary according to the annual profits of the issuer.

| 45 | The same applies to ‘profit-sharing bonds’, which are generally defined as obligations conferring entitlement to a portion of the issuer’s profits, in addition to the fixed interest which they provide. |
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45

The same applies to ‘profit-sharing bonds’, which are generally defined as obligations conferring entitlement to a portion of the issuer’s profits, in addition to the fixed interest which they provide.

| 46 | Similarly, ‘profit-participating loans’ are generally characterised by a fixed or variable base interest rate, supplemented by interest linked to the amount of the debtor’s profits. |
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46

Similarly, ‘profit-participating loans’ are generally characterised by a fixed or variable base interest rate, supplemented by interest linked to the amount of the debtor’s profits.

| 47 | As to a ‘silent partner’, regardless of the form taken, he is by definition intended to share in the profits of the undertaking in which he holds a stake, as the Republic of Austria indeed claims, without being contradicted. |
| --- | --- |

47

As to a ‘silent partner’, regardless of the form taken, he is by definition intended to share in the profits of the undertaking in which he holds a stake, as the Republic of Austria indeed claims, without being contradicted.

| 48 | Lastly, as regards the purpose of the provisions of which the phrase ‘debt-claims with participation in profits’ forms part, it should be noted that Article 11(2) of the Austro-German Convention appears as a derogation from the principle, expressed in Article 11(1) of that convention, of allocating between the States Parties their powers of taxation on the basis that interest is, in principle, taxed only in the State of establishment or residence of its beneficiary. That derogation enables interest earned on a debt-claim with participation in profits to be taxed ‘also’ in the State of its source. It is therefore for the State of the establishment or residence of the beneficiary of that interest to offset the double taxation by deducting the tax already levied at the source from the other tax owed by the holder of the debt-claim. |
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48

Lastly, as regards the purpose of the provisions of which the phrase ‘debt-claims with participation in profits’ forms part, it should be noted that Article 11(2) of the Austro-German Convention appears as a derogation from the principle, expressed in Article 11(1) of that convention, of allocating between the States Parties their powers of taxation on the basis that interest is, in principle, taxed only in the State of establishment or residence of its beneficiary. That derogation enables interest earned on a debt-claim with participation in profits to be taxed ‘also’ in the State of its source. It is therefore for the State of the establishment or residence of the beneficiary of that interest to offset the double taxation by deducting the tax already levied at the source from the other tax owed by the holder of the debt-claim.

| 49 | Having regard to the general scheme and purpose of the Austro-German Convention, which consists in avoiding, as far as possible, legal double taxation in cross-border situations between the two States Parties, the criterion allowing for derogation from the agreed allocation of powers of taxation, namely there being participation in profits, must be given a strict interpretation, such as that set out in paragraphs 40 to 42 above. |
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49

Having regard to the general scheme and purpose of the Austro-German Convention, which consists in avoiding, as far as possible, legal double taxation in cross-border situations between the two States Parties, the criterion allowing for derogation from the agreed allocation of powers of taxation, namely there being participation in profits, must be given a strict interpretation, such as that set out in paragraphs 40 to 42 above.

| 50 | A broad interpretation of the phrase ‘participation in profits’ referred to in Article 11(2) of the Austro-German Convention would be liable to limit the scope of Article 11(1) thereof, which, by a strict division of powers of taxation of interest, is intended to avoid any double taxation, whereas an application of Article 11(2) implies double taxation, the detrimental effects of which on the proper functioning of the internal market are mitigated only by the offsetting rule laid down in Article 23(1)(b) and (2)(b) of that convention. |
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50

A broad interpretation of the phrase ‘participation in profits’ referred to in Article 11(2) of the Austro-German Convention would be liable to limit the scope of Article 11(1) thereof, which, by a strict division of powers of taxation of interest, is intended to avoid any double taxation, whereas an application of Article 11(2) implies double taxation, the detrimental effects of which on the proper functioning of the internal market are mitigated only by the offsetting rule laid down in Article 23(1)(b) and (2)(b) of that convention.

| 51 | In the present case, it is common ground that the certificates at issue are remunerated annually on the basis of a fixed percentage of their nominal value, which is itself fixed, both values being predetermined at the time of issue. |
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51

In the present case, it is common ground that the certificates at issue are remunerated annually on the basis of a fixed percentage of their nominal value, which is itself fixed, both values being predetermined at the time of issue.

| 52 | It is true that the remuneration of those certificates has, furthermore, the particular feature that it is reduced or suspended when the financial year of the issuing company would end with a loss caused by that remuneration, with an adjustment being made subsequently in the course of the following beneficial financial years, provided that the payment of the arrears does not give rise to loss, those arrears thus being added to the payment of the interest otherwise due on the basis of the previous financial years. |
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52

It is true that the remuneration of those certificates has, furthermore, the particular feature that it is reduced or suspended when the financial year of the issuing company would end with a loss caused by that remuneration, with an adjustment being made subsequently in the course of the following beneficial financial years, provided that the payment of the arrears does not give rise to loss, those arrears thus being added to the payment of the interest otherwise due on the basis of the previous financial years.

| 53 | Nevertheless, that particularity implies only that the annual payment of interest is affected by the presence of sufficient net profit for that financial year, and not that the certificates at issue confer entitlement, in addition to annual interest, to a share in those profits. |
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53

Nevertheless, that particularity implies only that the annual payment of interest is affected by the presence of sufficient net profit for that financial year, and not that the certificates at issue confer entitlement, in addition to annual interest, to a share in those profits.

| 54 | Having regard to all of the foregoing considerations, the concept of ‘debt-claims with participation in profits’ referred to in Article 11(2) of the Austro-German Convention must be interpreted as excluding certificates such as those at issue in the present case. |
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54

Having regard to all of the foregoing considerations, the concept of ‘debt-claims with participation in profits’ referred to in Article 11(2) of the Austro-German Convention must be interpreted as excluding certificates such as those at issue in the present case.

| 55 | As regards the reciprocal claims of the Republic of Austria and the Federal Republic of Germany that the other should refrain from exercising its powers of taxation over the income of the certificates at issue, the reply given by the Court to the issue of the interpretation of Article 11(2) of the Austro-German Convention is sufficient in that regard. |
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55

As regards the reciprocal claims of the Republic of Austria and the Federal Republic of Germany that the other should refrain from exercising its powers of taxation over the income of the certificates at issue, the reply given by the Court to the issue of the interpretation of Article 11(2) of the Austro-German Convention is sufficient in that regard.

| 56 | As regards the reciprocal claims of the Republic of Austria and the Federal Republic of Germany for an order that the taxes wrongfully levied be reimbursed, there are, at all events, no grounds for upholding them. |
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56

As regards the reciprocal claims of the Republic of Austria and the Federal Republic of Germany for an order that the taxes wrongfully levied be reimbursed, there are, at all events, no grounds for upholding them.

| 57 | There is no information available to the Court that would allow it to adopt a position in that regard, in particular as far as concerns any possible interference with existing procedures potentially pending before the courts of either of the two States. |
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57

There is no information available to the Court that would allow it to adopt a position in that regard, in particular as far as concerns any possible interference with existing procedures potentially pending before the courts of either of the two States.

| 58 | It is therefore for the Republic of Austria and the Federal Republic of Germany to draw the proper inferences from the present judgment, by cooperating to that end in good faith. |
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58

It is therefore for the Republic of Austria and the Federal Republic of Germany to draw the proper inferences from the present judgment, by cooperating to that end in good faith.

Costs

| 59 | Under Article 138(1) of the Rules of Procedure of the Court, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. |
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59

Under Article 138(1) of the Rules of Procedure of the Court, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings.

| 60 | Since the Republic of Austria has applied for costs to be awarded against the Federal Republic of Germany, and the latter has been unsuccessful, it must be ordered to pay the costs. |
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60

Since the Republic of Austria has applied for costs to be awarded against the Federal Republic of Germany, and the latter has been unsuccessful, it must be ordered to pay the costs.

| | On those grounds, the Court (Grand Chamber) hereby rules: |
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On those grounds, the Court (Grand Chamber) hereby rules:

| | 1. | The concept of ‘debt-claims with participation in profits’ referred to in Article 11(2) of the Abkommen zwischen der Republik Österreich und der Bundesrepublik Deutschland zur Vermeidung der Doppelbesteuerung auf dem Gebiet der Steuern vom Einkommen und vom Vermögen (Convention between the Republic of Austria and the Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income and capital) of 24 August 2000 must be interpreted as excluding certificates such as those at issue in the present case. |
| --- | --- | --- |

1.

1.

The concept of ‘debt-claims with participation in profits’ referred to in Article 11(2) of the Abkommen zwischen der Republik Österreich und der Bundesrepublik Deutschland zur Vermeidung der Doppelbesteuerung auf dem Gebiet der Steuern vom Einkommen und vom Vermögen (Convention between the Republic of Austria and the Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income and capital) of 24 August 2000 must be interpreted as excluding certificates such as those at issue in the present case.

The concept of ‘debt-claims with participation in profits’ referred to in Article 11(2) of the Abkommen zwischen der Republik Österreich und der Bundesrepublik Deutschland zur Vermeidung der Doppelbesteuerung auf dem Gebiet der Steuern vom Einkommen und vom Vermögen (Convention between the Republic of Austria and the Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income and capital) of 24 August 2000 must be interpreted as excluding certificates such as those at issue in the present case.

| | 2. | The Federal Republic of Germany is ordered to pay the costs. |
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2.

2.

The Federal Republic of Germany is ordered to pay the costs.

The Federal Republic of Germany is ordered to pay the costs.

| | [Signatures] |
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[Signatures]

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  *1
  )	Language of the case: German.

*1