Germany: Real property management company premises can be permanent establishment of contracting company

Tax court decision

Permanent establishment of contracting company

The German Federal Tax Court (BFH) held (file ref. III R 35/20) that the premises of a real property management company can be a permanent establishment (PE) of the contracting company, even if the contracting company has no power of disposal over the premises, if the contracting company uses the premises to conduct its own business operations.


A German limited liability company (GmbH) domiciled in Germany was owner of real property also located in Germany. Two individuals domiciled in Luxembourg held interests in the GmbH, one of which was managing director of the GmbH. Because the place of effective management of the GmbH was in Luxembourg, another company was required to manage the property. The GmbH issued a comprehensive power of attorney for property management to the management company that covered all rights and obligations arising from rental agreements, the authorization for conclusion and termination of contracts for services and work, representation in dealings with other companies, authorities and courts as well as the engagement of lawyers. In the year under dispute, the GmbH realized income from rental and sale of the real property, and the question was whether the income was subject to German trade tax in addition to corporate income tax.

Only trading entities that are operated by a PE located in Germany are subject to trade tax. The PE must be of a certain duration, serve the operations of the business, and the taxpayer must have power of disposal over the PE that is not solely temporary. In the case of real property companies in particular, possession of a rental property in Germany alone is not sufficient to give rise to a PE. In addition, the management work customarily associated with collection of the rental fee and the maintenance of the property generally is not sufficient for the establishment of a PE at the place of the real property as this management work is typically carried out by the owner of the PE from its administrative headquarters.

The lower tax court in this case nonetheless found the existence of a PE of the GmbH at the management company because there were close economic links between the two companies and the GmbH supervised the management company in writing and by telephone. On appeal, the BFH found that those factors were insufficient to give rise to the existence of a PE. However, the BFH concluded that a PE of the contracting company may exist, even if the contracting company does not have disposal over the management company’s premises, but only if the contracting company can conduct its own business operations at the premises of the management company. The contracting company may be treated as conducting its own business operations at the premises of the management company if the contracting company and the management company are essentially the same company, the contracting company actually transfers full management responsibility to the management company, or the contracting company carries out the supervision of the management company locally in the premises of the management company. By contrast, supervision by telephone or writing from the contracting company's own administrative headquarters is insufficient. The BFH referred the case back to the lower court to make necessary factual findings based on the BFH’s decision.

Read an August 2022 report [PDF 1.3 MB] prepared by the KPMG member firm in Germany 


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