Germany: Attribution of profits of permanent establishment without personnel (court decision)

The German Federal Tax Court (BFH) recently affirmed a decision of the Lower Tax Court of Saarland in a case concerning the attribution of assets, attribution of profits, and so-called “passive exit” in the case of permanent establishments without personnel.

The lower court suspended the enforcement of the tax assessment based on serious doubts as to the legality of the assessment, but that court has not yet addressed the ultimate legality of the assessment. Read TaxNewsFlash

The case identifying information is: file ref. 1 B 44/21 (24 November 2021). 

The taxpayer (a German limited partnership) operated a wind farm on leased property since 2011. The taxpayer's partner was a Danish partnership. The taxpayer had no staff of its own either in Germany or in Denmark. Both technical and business management were carried out by two German service companies.

Effective 1 January 2013, the Authorised OECD Approach (AOA) for attributing profits to a permanent establishment was transposed into German tax law. Accordingly, a permanent establishment is treated as a separate and independent business entity. The “significant people function” is relevant to the attribution of assets. As a result, the German tax office assumed that all assets and transactions were, contrary to previous practice, not attributable to the taxpayer's German permanent establishment (wind farm), but instead, for the first time, to the management permanent establishment in Denmark because the sole and, thus, the significant people function of the taxpayer was performed in the management permanent establishment in Denmark. As a result, all of taxpayer’s assets exited for tax purposes. Furthermore, the current loss from the year under dispute (2013) could no longer be taken into account in Germany.

The Lower Tax Court of Saarland first found that the wind farm—according to German law, as well as pursuant to the tax treaty with Denmark—involved a German permanent establishment whose income came under German tax jurisdiction. Furthermore, the wind farm's assets were also to be attributed to this German permanent establishment for the period prior to 2013.

However, in its findings, the lower court expressed the following “serious doubts” as to:

• Whether the assets of the German permanent establishment following introduction of the AOA with effect from 1 January 2013 were now attributable to the management permanent establishment in Denmark and, as a result, this resulted in the realisation of profits through fictitious withdrawal.
• Whether the attribution of assets according to the people function could even be applied at all in the case of permanent establishments without personnel.
• Whether a so-called "passive exit" could occur if Germany's right to tax is excluded or restricted just through government action (i.e., due to transposing the AOA into law with effect from 1 January 2013).

In response to these questions, the court found:

• The issue of assets (which previously were attributed to a German permanent establish­ment) possibly exiting as a result of implementing the AOA concerns cases when the permanent establishment existed already before 1 January 2013.
• The doubt regarding attributing assets in the case of permanent establishments without personnel could also be appliable in other cases (e.g., computer servers or solar parks).
• The doubt regarding the so-called "passive exit" could equally be transferable to other cases (e.g., concluding a new tax treaty or amending an existing tax treaty, whereby the German right to tax assets is restricted or excluded).

Read an April 2022 report [PDF 344 KB] prepared by the KPMG member firm in Germany