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Greece enhances application of the credit method for the elimination of double taxation

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The decision is a step towards the correct application of the ordinary credit method

Konstantinos Mavraganis of EY in Greece explains how recent jurisprudence has established clearer guidance on the benefits of double tax treaties for providing legal certainty.

The Greek Supreme Administrative Court recently issued court decision No. 653/2020, acknowledging that foreign paid tax should be credited against domestic income tax on a first priority basis; domestic tax withheld and tax prepaid may follow in priority. Such a development is of great importance for Greek tax residents with foreign-sourced income.

In detail, the court dealt with a case where a Greek legal entity maintained a permanent establishment in Cyprus, claiming credit against domestic tax liability for:

  • The domestic tax withheld and tax prepaid; and

  • The full amount of income tax paid in Cyprus.

When it comes to foreign tax credit, the Greek Tax Administration consistently accepts such credits, but only up to the amount of the corresponding Greek corporate income tax due. This is also consistent – in theory – with the country’s international obligations, as the vast majority of Greece’s double tax treaties provide for a (limited) ordinary tax credit method, as a means of eliminating double taxation.

The implementation of this theoretical stance had led, though, to an ambiguous practice by the Greek Tax Administration, whereby a refund was negated in case the above credit runs in excess of the amount of the corresponding Greek corporate income tax due, after subtracting the total amount of domestic tax withheld and tax prepaid from the latter.

This practice implied that the Greek Tax Administration gave priority to the provision of the above mentioned domestic tax credits, leaving foreign income tax credit at the end of the priority line, thus disallowing the refund of the excess credit amount, on the premises that this would appear as a refund of tax paid abroad. As a result, in certain cases, only a portion of the foreign tax would be credited against the domestic income tax, and taxpayers were not able to fully enjoy the benefit of the credit method for eliminating double taxation, in spite of the explicit clauses of the relevant double tax treaties.

This was not in line with Greece’s double tax treaties, which stated that foreign tax credit would be granted, subject to Greek law. However, this reference to Greek law should be interpreted as a reference to just the procedural rules for evidencing foreign tax credit, rather than any other priority rules that could impair the foreign tax credit mechanism, which safeguards the elimination of double taxation.

In the herein discussed case-law, the court ruled that foreign tax credit against domestic income tax should be granted on a first priority basis, whereas domestic tax withheld and tax prepaid may follow. This enables Greek tax residents to fully enjoy the benefits of the credit method for eliminating double taxation.

The above mentioned jurisprudence is a significant step toward the correct interpretation and application of the notion of the ordinary credit method, in line with Greece’s international obligations. Moreover, to the extent that it respects the legal supremacy of the double tax treaties against purely domestic legal provisions, it should now form the basis for establishing a higher degree of legal certainty and, consequently, a clearer tax environment; a crucial factor for building trust between the tax administration and taxpayers, going forward.


Konstantinos Mavraganis


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