German domestic law requalifies rental and interest income into business income in cases where a business consists of two entities under common control or when the shareholder holds assets that are key for the business, privately. The same happens when a passive holding partnership, that is just hiring assets, is structured in a way that the business is legally exclusively represented by the sole partner with unlimited liability, under the condition that this partner is a limited corporation. Those fictions aim to avoid trade tax evasion and are generally accepted, although partly only legitimised by court decisions.
Germany used those same fictions for income qualification purposes when applying the DTAs, which in many cases led to qualification conflicts, since the other state obviously did not apply those rules, nor did most of the treaties contain any hint of the rules. A good aspect of the aforementioned treatment was that exit taxation could be avoided when the partner (individual) moved abroad if a business PE remained in Germany. German authorities repeatedly lost with the aforementioned treatment in front of the German Supreme Tax court, and were then confronted with the fact that taxpayers were not taxed upon movement and so could not be taxed (by Germany) any more, because of the DTA rules. In order to save (or regain) that taxation right, a Treaty-overriding article (Art. 50i personal income tax act - EStG) was introduced in 2013, saying that Germany taxes notwithstanding the Treaty rules.
Despite the general and ongoing discussion in Germany, in which cases Treaty-overrides are generally acceptable from a constitutional perspective it turned out that the introduced rule did not really fit to all intended cases so that an extension of that article was introduced soon after. However, the new version of the article is so broad, that its literal application could hinder numerous, even purely domestic, restructurings which should be possible without the taxation of hidden reserves, based on other rules that aim to do exactly that. Futhermore, the application of those rules should in any case be reduced to reserves, that formed after the rule’s first applicability (29 June 2013), which unfortunately is neither reflected by the wording nor the available interpretations by the authorities. It is a pity that German authorities and legislation are unable to accept the consequences of their own false former action and interpretation, although long before the court decisions (in 2010) it was quite obvious that the German interpretation was in conflict to any other states on how to qualify income for treaty-purposes.