Establishment of a permanent establishment by involving a service company
Decision of the German Federal Court of Finance (“BFH”) of March 23, 2022 (case no. BFH III R 35/20)
In the case at hand, the BFH commented on the question of when the involvement of a service company may result in a permanent establishment (“PE”) of the client. With a domestic PE, a non-resident taxpayer may become subject to tax liability in Germany. In international tax law, the establishment of PEs is a red-hot topic – not only in times of increased home office activities – which may have serious tax consequences and poses numerous practical challenges for both businesses and tax advisors.
The BFH had to assess the case of a GmbH with its registered office in Germany, the sole managing director of which was a non-resident for tax purposes in Germany. The GmbH owned a residential and commercial building in Germany. An asset management company had been engaged to perform property management services and was granted any rights and obligations in connection with the property’s management.
PE as nexus for trade tax purposes
The court had to decide whether the GmbH was subject to trade tax (in Germany). As such tax liability depends on whether the GmbH has a PE in Germany, this was the decisive factor of the dispute.
When does it qualify as a PE?
A permanent establishment is a fixed place of business or facility serving the company’s business activities. According to established case law, this includes business facilities or installations with a fixed connection to the earth’s surface, which are of a certain duration, serve the company’s activities and over which the taxpayer has a power of disposition that is not merely temporary.
Rented real property may qualify as PE
The BFH reaffirmed that a rented property located in Germany cannot generally constitute a PE of the leasing company, without further ado. This is since ownership or possession of a property alone is not sufficient for it to directly serve the company’s activities, as long as no further business activities are performed at the rented property.
Service provider’s involvement may result in the establishment of a PE
The BFH explained that a third party’s PE may also qualify as an entrepreneur’s own PE if the entrepreneur is authorized to use the facility or plant according to his business’s needs.
A comprehensive transfer of one’s own tasks to an independent third party is not sufficient to establish a PE at the third party’s premises. Rather, it requires the authority to conduct one’s own business activities at the relevant site, which must be performed with a certain sustainability to replace the otherwise required power to dispose of the third party’s premises.
If the main company and the service company are managed by the same persons (personal union), one can assume that the main company performs its own operating activities at the service company’s location. If there is no personal union, services required for the establishment of a PE may include, for example, the sustained supervision of the subcontractor.
Under certain circumstances, the managing director’s premises may qualify as management PE.
According to the BFH, a management PE can be established at the service company’s registered office and/or the managing director’s place of residence. This does not require an actual power of disposition over the premises.
If significant decisions to be made in the ordinary course of business are actually made by the engaged service company, the service company’s business premises may qualify, under certain circumstances, as management PE.
Significance of the decision:
The BFH shows how complex the examination of the question for a PE’s establishment by involving a service provider is.
If a PE should be established, one must closely examine
- how other countries qualify the service provider’s activities,
- what income is attributable to the PE, and
- under what circumstances, double taxation is imminent or can be avoided.
Examination scheme for the identification of service PEs