In Germany, national requirements determine whether or not an agency permanent establishment exists and thus also the limited tax liability there. These conditions have been specified by administrative opinion and court rulings. The Federal Fiscal Court (Bundesfinanzhof, BFH), in its latest ruling, has now widened the scope.
Requirements of an agency permanent establishment
Section 13 of the Fiscal Code (Abgabenordnung, AO) requires that business be conducted in a sustained manner; this generally implies working repeatedly and more than just for a short time on the basis of a voluntary decision made in advance. Sporadic and/or occasional postings and/or the work of representatives would be insufficient.
The case in question – A Luxembourg-based corporation
In autumn 2018, the BFH ruled on a case that involved a Luxembourg-based corporation. Its commercial transactions were conducted by the majority shareholder and, at the same time, sole managing director (M) primarily at the company’s offices in Luxembourg. Among other things, M also owned an apartment in the German border area where he would likewise conduct commercial transactions on behalf of the company.
The German tax office was of the opinion that, in view of these commercial activities in Germany, M was a permanent representative for the company within the meaning of Section 13 AO and that the latter was subject to limited corporation tax liability in Germany.
The tax court that dealt with this case did not accept the argument made by the tax office. Instead, while making reference to so-called organ theory in German law (Organtheorie) – according to which there is mutual exclusivity between acting as a managing director and acting as a representative – the court held that M, as an organ of the corporation, could not be the company’s permanent representative as well. The tax office lodged an appeal with the BFH against this ruling.
The BFH views acting as an organ as acting as a representative
The view of the tax court was rejected by the BFH in its ruling from 23.10.2018 (case reference: I R 54/16). The requirements under Section 13 clause 1 AO, according to the wording, could also be fulfilled by persons acting in their capacity as an organ of a legal entity. Managing directors could accordingly, at the same time, be permanent representatives and thus justify a limited corporation tax liability for a foreign company in Germany.
Furthermore, also according to the wording of the AO (e.g. Section 34(1), Section 79(1) no. 3 AO) acting as an organ should be viewed as acting as a representative. Moreover, the history of Section 13 AO as well as the teleological interpretation accordingly provide no indication of any narrowing of the definition of a permanent representative.
The change in case law is contrary to the opinion that hitherto prevailed
Up to now, there had not been a supreme court decision on whether or not the managing director of a foreign corporation could be a permanent representative within the meaning of Section 13 AO. With the above-mentioned ruling, the BFH has gone against the previous decisions of the financial courts and prevailing opinion that the organ theory in German law is also applicable to tax law. The managing directors of foreign companies will no longer be able to invoke this theory if they work in Germany.
Recommendation: As a result of the expansion of the concept of a permanent establishment, to include the organs of a corporation, even closer attention should be paid as to whether or not a foreign legal entity might possibly have founded a permanent establishment in Germany. In order to avoid having unclear information you should document the managing director’s abodes and business transactions.
WP/StB [German public auditor/ tax consultant] Dr Matthias Heinrich
StBin [German tax consultant] Julia Hellwig
From: PKF newsletter 07-08/2019