Position of the German tax authorities on Service PEs

A permanent establishment (“PE”) is a key factor in establishing a limited tax liability in Germany. Also, German trade tax depends on the existence of a PE in Germany. The existence of a so-called "Service PE" has recently been addressed by the Berlin-Brandenburg Tax Court and the Federal Fiscal Court (BFH). The tax authorities have now taken into account these decisions and set out their position in the Application Decree to the German Fiscal Code (“AEAO”) on Sec. 12 of the German Fiscal Code (“GFC”).

Background

According to Sec. 12 sentence 1 GFC, a PE is a fixed business facility that is connected to the ground for a certain period of time and over which the taxpayer must have a certain power of disposal. In principle, these characteristics can also be met by the business premises of a service provider of the company – even if the service provider has not granted a right of use of its business premises. The existence of a PE can also result from Sec. 12 sentence 2 GFC, according to which the place of management also constitutes a PE. The question of whether and under what conditions the hiring of a domestic service provider constitutes a German PE of the foreign client is of particular practical relevance in connection with the leasing of real estate located in Germany by a foreign corporation. If there is no PE, the income generated is subject to corporate income tax but not trade tax (so-called “no-PE structures”). In one such case, however, the Berlin-Brandenburg Tax Court affirmed the existence of a PE in the first instance (of 21 November 2019 – 9 K 11108/17) and justified its judgement with a "close economic connection" between the foreign landlord (principal) and the property management company (service provider) acting on its behalf in Germany. The Federal Fiscal Court limited this understanding (of 23 March 2022 – III R 35/20) in the appeal proceedings and ruled that the mere commissioning of a domestic service company without further circumstances does not lead to a German PE of the foreign principal. Following a referral back to the Berlin-Brandenburg Tax Court, the latter ruled in the second instance (Berlin-Brandenburg Tax Court of 28 June 2023 - 11 K 11108/17) that the plaintiff did not have a fixed place of business in Germany in this case. However, it confirmed the existence of a domestic place of management on the basis of the centre of business control pursuant to Sec. 10 GFC. Such a place is located where the "day-to-day business" is conducted. In the case in question, the day-to-day business was deemed to be conducted by the service provider and the foreign principal was unable to prove the contrary.

Position of the tax authorities

The decisions of the Berlin-Brandenburg Tax Court and the Federal Fiscal Court are now followed by the explanations in the revised Application Decree on Sec. 12 GFC:

• Only the partial or complete commissioning of a service provider is generally not sufficient for a company to establish a PE on its premises.
• However, a company may have a German PE on the premises of the service provider if it carries out its own business activities at this location on a permanent basis. This may be the case, for example, if the foreign principal actually supervises the service provider on site. This is presumed to be the case if the management of the contracting entity and the service provider is carried out by the same person.
• Exceptionally, the existence of a PE is not linked to a power of disposal if a company has the "material and personnel organisation" of the service provider at its disposal and can therefore carry out its business activities "operationally" on the premises of the service provider.
• In addition, a PE may exist on the service provider's premises if the service provider actually carries out the client's management activities (management PE).
• The question of whether an establishment or fixed asset 'directly serves' a business is determined by whether a separate business activity with a fixed local connection is carried out on the premises. In this respect, it depends on a certain "rootedness" of the company in the place where the business activity is carried out.

Practical consequences

The amended explanations of the tax authorities in the Application Decree to the GFC are particularly relevant for foreign companies with German properties. In particular, the involvement of a property management company responsible for the properties in Germany may lead to the existence of a PE for management purposes. In order to avoid a tax nexus in Germany, it is therefore necessary to carefully prove that no management decisions are made there. Mere verbal assertions that, for example, contracts are approved or tax returns are signed abroad are not sufficient. Instead, evidence should be provided in the form of emails, text and WhatsApp messages or letters. The same applies to service providers used within the group: service contracts and powers of attorney should contain clear wording that excludes management activities in Germany. Of course, this must also be put into practice.

-----------

The Federal Ministry of Finance has published a new version of the AEAO on Section 12 AO dated February 5, 2024. In the update, the understanding of the term "permanent establishment" is explained in much more detail than was previously the case, and the view of the tax authorities on the place of management is now also articulated by the AEAO on Section 10 AO. Our colleagues Sven-Eric Bärsch and Daniel Keuper provide an initial overview in their blog post.

Well done, you’ve escaped the daily commute! But when does working from home end up creating a permanent establishment? The German tax authorities addressed this question for the first time in their revised version of the Application Decree to the German Fiscal Code (AEAO), published on 20 February. The revision provides needed clarification but could it give rise to problems in cross-border remote working cases? Christoph Klein und Yannick Barbu have more in their blog post.