New administrative guidance on the place of effective management

The increased mobility of individuals can also have far-reaching consequences for companies. The place of effective management (Sec. 10 General Tax Code, referred to as “GTC”) is of great importance as a nexus for unlimited (i.e. resident) taxation in Germany. For this reason, companies with their legal seat situated abroad should take care not to unintentionally establish the place of effective management in Germany if a shielding effect from German taxation is to be maintained. However, even German companies should also bear this tax nexus in mind. The German Ministry of Finance (Bundesministerium der Finanzen, referred to as "BMF", published a new administrative guidance on the definition of the place of effective management.

Centre of commercial executive management

Section 10 GTC defines “management” as the centre of commercial executive management, which is to be understood as the exercise of management functions. In the view taken by the BMF, this should be the place where the relevant will for the management is formed. Management includes all decisions and measures necessary for the day-to-day business activities of the company that are of some importance to the company. The decisive factor is where these activities actually take place.

The exercise of management functions is usually carried out in suitable premises. However, in the view taken by the BMF, the place of effective management does not necessarily have to be a fixed and separate business establishment. Consequently, the place of effective management could also be the managing director's home or even the premises of a service or management company (see also our blog post from February 23, 2024). 

The BMF also states that management decisions taken on business trips are not generally suitable for establishing a place of management due to the lack of a location-based facility at the place of work and the characteristic of permanence. As with the requirements of a permanent establishment (“PE”), a place of management will also require a certain regularity.

The BMF further clarifies that every company must have (at least) one place of effective management. If no place of effective management can be determined, the BMF has taken the view that the competent tax office should be able to take the domicile of the managing director or, if applicable, the registered office/domicile of the shareholder as the place of effective management.

Management at several locations

If the business is conducted from several locations (e.g. by several managing directors), the centre of commercial executive management shall be situated where the most important location for the company is located. To this end, the decisions made at different locations should be weighted, whereas the administrative guidance does not specify the exact criteria to be used. At least, commercial management should be prioritised over technical management.

In the event that several individuals perform equivalent management tasks from different locations and no weighting is possible, the BMF has taken the view that several management PEs should exist. While German case law assumes that this will very rarely be the case, this constellation is likely to become increasingly important in practice. The decentralisation of management functions, the use of digital communication and the increasing use of work from anywhere are likely to make it significantly more complex, but also increasingly important, to determine the place of effective management.

Implications

For the first time, the German tax authorities sets out their understanding of the terminology of the place of effective management in a separate administrative guidance. Their view corresponds to German case law in numerous places. Nevertheless, companies with their legal seat situated in Germany or abroad usually should avoid any unintentional divergence between their legal seat and place of effective management to mitigate the risk of international double taxation.

In conclusion, the new administrative guidance points out that the actual circumstances of the individual case, such as the type, scope, structure and nature of the company, must always be considered individually when determining the place of effective management.

Please feel free to contact the authors or your usual FGS contacts if you would like to discuss the topic of the nexus as discussed in this blog post in more detail.

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Well done, you’ve escaped the daily commute! But when does a company actually establish a permanent establishment in Germany? The German tax authorities addressed this question by publishing a new version of the AEAO on Section 12 AO, published on 20 February. In the update, the understanding of the term "permanent establishment" is explained in much more detail than was previously the case. Our colleagues Sven-Eric Bärsch and Daniel Keuper provide an initial overview in their blog post.