Update of the guidance on mutual agreement and arbitration procedures

The update of the circular from the German Federal Ministry of Finance (BMF) on international mutual agreement and arbitration procedures brings far-reaching changes for companies and advisors. In addition to taking the Multilateral Instrument (MLI) under the Base Erosion and Profit Shifting (BEPS) initiative into account, introducing new rules on eligibility to apply, and significantly simplifying digital application submission, the new circular clarifies how to deal with previous mutual agreements—thus laying the foundation for a more efficient and accelerated procedural process.

International mutual agreement and arbitration procedures serve to eliminate double taxation and are a key instrument for ensuring consistent taxation of multinational corporate groups. The circular from the German Federal Ministry of Finance specifies the administrative requirements, deadlines, and procedures in addition to applicable double taxation agreements (DTAs), the European Union (EU) Arbitration Convention, and the EU Double Taxation Dispute Resolution Act (EU-DBA-SBG).

The circular from the Federal Ministry of Finance is an internal administrative instruction binding only for the tax authorities. Although it does not have legal binding effect for taxpayers, it provides essential practical guidance, as it clearly structures the procedural steps, application requirements, and demarcation issues of international mutual agreement and arbitration procedures. It explains the procedures based on three central legal bases: DTAs, the EU Arbitration Convention, and the EU-DBA-SBG. In the current version dated 24 September 2025, the BEPS MLI Implementation Act (BEPSMLIAnwG) is also included as an additional legal basis, thus ensuring alignment with modern multilateral standards.

Overall, the circular not only explains the procedural steps based on the individual legal bases, but also their application requirements, enabling taxpayers to better assess which legal basis is most suitable for a particular case. The circular is regularly updated to reflect current developments in international tax law, new case law, and coordinated administrative opinions in a timely manner.

The most recent valid version dated 21 February 2024 brought targeted clarifications: Partnerships generally remained ineligible to apply themselves, but received clearer guidelines on the treatment of non-treaty-eligible partners and on the eligibility of opting companies under § 1a KStG. In addition, the formal application requirements have been tightened to the effect that an application will only be processed once all required documents have been submitted in full. For joint applications by multiple employees, it was clarified that these can be considered timely if at least one complete application is submitted on time and the other applicants are clearly identifiable.

With the new version dated 24 September 2025, the previous circular was updated. The most important changes can be summarized as follows:

Factual Agreements

The new version of the circular clarifies that factual agreements, like binding rulings and binding commitments, no longer have binding effect in the mutual agreement procedure if the underlying facts differ in the international mutual agreement or arbitration procedure (see para. 33). The tax authorities are thus no longer bound by domestic agreements and can take into account deviating or new findings of fact.

In practice, such previously reached agreements during tax audits often led to difficulties, as the same facts were later taken up by a foreign tax authority and the German tax authorities adhered to the earlier agreement. However, this contradicted the compromise-oriented nature of a mutual agreement procedure and made interstate agreement significantly more difficult. If no agreement was reached between the states within two years, the case had to be referred to arbitration, which could be extended by up to another year. By removing the binding effect, the necessary openness of results is now created to facilitate international solutions and, where possible, avoid lengthy arbitration procedures.

Electronic application via the BZSt online portal

The new version of the circular allows, in addition to the still valid possibility of written submission, for the first time the submission of applications via the online portal of the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt) (“BOP”) (see paras. 37–38). The previous obligation to submit applications in writing and often in multiple copies is completely eliminated. This digitization is clearly to be welcomed, as it significantly simplifies the procedure, reduces administrative effort, and accelerates the initiation of a mutual agreement or arbitration procedure.

Initial practical experience shows, however, that a combined use of the new and previous submission methods has proven particularly effective. Here, applications themselves are sent via email to the BZSt, but the often extensive attachments are already transmitted via the newly available online portal. It should be noted, however, that the server provided for transmission via BOP is only available temporarily and its use requires prior individual activation by the BZSt. As a result, certain practical restrictions remain, which cannot yet fully substitute the previous process, but overall, already enable a significant simplification of the procedure.

Application eligibility for tax groups

In the area of tax groups, eligibility to apply is now significantly simplified. Whereas it was previously unclear which company within a tax group was allowed to submit an application, the new version clarifies that only the affected subsidiary is eligible to apply. The parent company can only submit an application if the underlying facts directly affect it and have tax implications for it. This clarification is to be welcomed, as previous administrative practice often led to uncertainties and the application process was often time-consuming due to required powers of attorney and coordination with the parent company. The now clear allocation of eligibility increases legal certainty and eliminates the previously existing interpretative uncertainty, which in practice often led to delays and increased coordination effort.

Revised version for implementation of the agreement

The new version specifies that the implementation of a mutual agreement can only take place once all necessary declarations have been submitted (see para. 93a). In addition, implementation remains subject to the withdrawal or waiver of relevant legal remedies by the applicant or the domestically affected persons. For example, an already pending objection must be expressly withdrawn before implementation can take place.

In tax group cases, it is also stipulated that required waivers must be submitted not only by the applying subsidiary, but also by the parent company, provided it is entitled to legal remedies. This creates an additional pitfall, as both parties must now submit the relevant declarations in due time and form.

Inclusion of the BEPSMLIAnwG as an additional legal basis

The circular furthermore explicitly designates the BEPS MLI Implementation Act – namely the Multilateral Instrument (“MLI”) developed under the OECD Base Erosion and Profit Shifting (“BEPS”) initiative for the coordinated modification of double taxation agreements – as a legal basis for mutual agreement and arbitration procedures (see paras. 1 and 34). The MLI serves to standardize dispute resolution processes, as DTAs are supranational treaties under international law, but their practical application is often influenced by the national laws of individual states. By incorporating the MLI, these procedures are further harmonized. In addition, the overview of DTAs with arbitration clauses has been updated, including the note that Greece, Spain, Malta, and Hungary have restricted their arbitration procedures under DTAs. This increases transparency regarding which treaty relationships will actually allow for arbitration in the future and is therefore to be welcomed.

Remaining double taxation

The new version of the circular clarifies that any economic double taxation remaining after a mutual agreement or arbitration procedure in Germany can only be taken into account as a discretionary relief (see para. 99), unless covered by Section 34c (6) sentence 6 EStG.). The effect of such a relief is limited to the scope of Section 34c (6) sentence 6 EStG. Such a measure constitutes a kind of discretionary decision by the tax authorities, to which the taxpayer has no legal entitlement.

In practice, such cases of double taxation may arise in various instances, for example when the outcome of a mutual agreement procedure is assessed differently for tax purposes by the jurisdictions involved, or when a mutual agreement is only implemented in part by the other jurisdiction.

The new version of the circular dated 24 September 2025 represents another step towards greater clarity, modernization, and harmonization in international mutual agreement and arbitration procedures. While earlier versions contained only targeted clarifications, the current version expands the legal bases and thus strengthens alignment with international standards.

At the same time, it improves the practical handling of procedures through a clear definition of eligibility, the possibility of digital application, and more precise requirements for the implementation of interstate agreements. The removal of the binding effect of domestic mutual agreements also promotes the necessary openness of results in international procedures and can reduce lengthy arbitration procedures. Overall, the revision increases legal certainty, transparency, and efficiency for both taxpayers and the administration, and ensures that mutual agreement and arbitration procedures remain an effective tool for avoiding double taxation.

However, some practice-relevant points have unfortunately not (yet) been clarified in the current revision, such as issues relating to secondary adjustments or details regarding the interpretation of the new EU-DBA-SBG. It is to be hoped that these aspects will be addressed in one of the next revisions.

It should also be noted that the Organisation for Economic Co-operation and Development (OECD) has recently updated its manual for conducting international mutual agreement and arbitration procedures (see OECD “Manual on Effective Mutual Agreement Procedures” (2026 Edition) of February 2, 2026). It also provides additional valuable insights for practical application.