Permanent establishment through a management company

Wed 16 Dec 2020

BEPS 2.0 continues to call into question what indeed is a permanent establishment (PE).  We all know that ‘bricks and mortar’ is almost ‘a ghost of Christmas past’ and states are now focused more on activities that have the potential to create nexus or PE status.  This is certainly the underpinning of the sweeping world of digital taxation already unilaterally implemented in many countries.  But some countries are going a step further and zooming in on industry.  Take Germany for example, which seems to be clamping down on foreign-owned real estate moguls that retain management companies to oversee their realty holdings and empires.  Creating this type of PE could be contagious in other jurisdictions, so perhaps the industry should more closely watch the business of their management companies.  See below for the surprise case in Germany that has the tax community a buzz.  Do you see a similar nexus theme in your country?

1.Circumstances

The subject of the dispute was whether the claimant, a GmbH (private limited company) with its place of management in Luxembourg, was liable to trade tax. The claimant derived income from real estate located in Germany. The management tasks in connection with the real estate were transferred to a management company, which the claimant had authorised to execute all relevant activities for this purpose. The management company carried out its activities on its own premises in Germany. The claimant, on the other hand, did not maintain its own facilities in Germany.

2. Decision of the court

The Fiscal Court decided in favour of the tax office and affirmed the existence of a PE in Germany. The claimant was subject to trade tax. Although the claimant did not carry out its activities in a fixed place of business in Germany, the mere fact that a service or management company resident in the source state carries out managerial tasks, as guaranteed by contracts, in its business premises shall be sufficient for a permanent establishment to exist. The Fiscal Court bases its findings on several decisions of the Federal Fiscal Court (BFH, 24.8.2011, I R 46/10; 23.2.2011, I R 52/10; 8.6.2015, I B 3/14), according to which the assignment of a management company is sufficient for the affirmation of a permanent establishment within the meaning of Sec. 12 sentence 1 of the Fiscal Code of Germany (AO). The company to which the claimant assigned the management activities was to be regarded as a management company within the meaning of Federal Fiscal Court case law. It acted for the claimant in a comprehensive asset management capacity. Furthermore, the claimant had continuously supervised the management company in the performance of its activities.

3. Practical impacts

The decision is of far-reaching importance for inbound real estate investments in Germany. It is common to acquire German real estate through foreign companies in order to avoid the creation of a German PE and, consequently, the liability to trade tax. This objective is not achieved if a domestic PE is attributed to the foreign company as a result of the assignment of a management company. In the case in dispute, in contrast to the case law of the Federal Fiscal Court to which the Fiscal Court referred, the management bodies in the companies involved were not identical. However, the Fiscal Court affirmed the existence of a PE as a result of the extensive scope of administrative activities outsourced to the management company and on the basis of continuous supervision by the foreign company. The decision proves the necessity of thoroughly analysing the contractual relationships maintained by foreign real estate companies with domestic service providers in order to mitigate tax risks.