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) must be interpreted as excluding certificates, the terms of issue of which 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; 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; 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; 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.

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.

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.

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.

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.

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

Next, as regards context, 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 that their remuneration is supposed to vary according to the annual profits of the issuer.

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.

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 above.

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.

(see paras 12, 32, 40-44, 48-50, 54, operative part 1)