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

Attribution of assets, attribution of profits, and so-called "passive exit" in the case of permanent establishments without personnel

Attribution of assets, attribution of profits, and so-called "passive exit"

The Lower Tax Court of Saarland issued its findings 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 case identifying information is: file ref. 1 V 1374/20 (30 March 2021). 

KPMG observation

These proceedings only addressed suspending the enforcement of the tax assessment. Such suspension is to be effected when there are serious doubts as to the legality of the tax assessment.

Background

  • 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 own staff 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.

Court’s findings

The Lower Tax Court of Saarland first found that in the case of 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 court expressed “serious doubts” in many respects regarding the legality of the tax office's view:

  • Serious doubt 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.
  • Serious doubt as to whether the attribution of assets according to the people function could even be applied at all in the case of permanent establishments without personnel.
  • Serious doubt as to 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).

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 transferable to 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).

In the proceedings to suspend enforcement, only a summary review was conducted as to whether there also are substantial cir­cum­stances that contradict the legality.

The tax office has filed an appeal with the German Federal Tax Court against the lower court’s findings (file ref. I B 44/21). The Lower Tax Court of Saarland has not yet reached a decision on the main proceedings.

Read an October 2021 report [PDF 337 KB] prepared by the KPMG member firm in Germany

 

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