The German finance ministry has published comprehensive tax guidance on the allocation of profits between a business and a foreign permanent establishment. The goal is presumably to ensure German taxing rights and to help solve international taxing disputes by providing clarifications and examples based on internationally accepted principles. Business and professional associations are invited to submit comments by May 13.
Under German law, when a business has a permanent establishment in another country, the income must be divided and allocated according to the arm’s length principle. As stipulated in article 1 para 5 of the German Foreign Transaction Tax Act (AStG), the profits that the permanent establishment would have earned if it would have been a separate and independent entity must be allocated to it.
This rule, based on the authorized OECD approach (AOA) and the OECD report on permanent establishments, applies to all financial years beginning after December 31, 2012 (article 21 para. 20 sent 3 AStG). Details on the application of the arm’s length principle are stipulated in the Permanent Establishment Profits Allocation Ordinance (Betriebsstättengewinnaufteilungsverordnung -BsGaV), which applies to all financial years beginning after December 31, 2014 (article 40 BsGaV).
To clarify further details and specific questions, the German finance ministry published the 152-page draft circular on March 18 (BMF-Schreiben zur Betriebsstättengewinnaufteilung). The guidance is applicable to both German companies with foreign permanent establishments as well as to foreign companies with German permanent establishments.
The draft defines the scope of the arm’s length principle, certain terms, the relationship of the PE rules to other domestic rules and to double tax treaties, as well as consequences for cases involving tax credits and local business tax.
The stipulated administrative principles for the assessment of the application of the arm’s length principle apply to all cross border cases of simple PEs, even if a double tax treaty is applicable. It is emphasized that these rules are of income correctional nature, and lead only to either an increase of domestic income of a limited taxable persons or entities or a decrease of foreign income of a fully taxable person or entity in Germany.
The document also provides clarifications and examples on how to make allocations; on auxiliary calculations; and on how to assign personal functions, assets, business transactions, and risks. Fictional contractual obligations between business and permanent establishment are also addressed, as well a specific rules for banking, insurance, construction PEs, and permanent agents.
The draft deals in particular with situations in which it is legally impossible to directly apply the “separate entity” concept of the AOA. It also describes scenarios involving the application of double tax treaties and of consequences of the AOA on different time periods and financial years, as well transitional rules.
Publication of the final circular is planned for the second half of 2016 after coordination with the state finance administrations.
See:
- Circular (in German)
Ninja-Antonia Reggelin
Ninja-Antonia Reggelin is based in Berlin, where she is head of tax policy at a business association.
She previously worked at the OECD, contributing to the project that led to the publication of the BEPS Action Plan. Prior to that, she was with PwC Germany, where she focused on international tax structuring.
Ninja holds a Master’s degree (LL.M.) in International Trade Law from Bond University Australia and a Master’s degree (M.A.) in International Relations from the University of Kent Brussels School of International Studies.
Latest posts by Ninja-Antonia Reggelin (see all)
- German cabinet passes stimulus tax measures - June 12, 2020
- Germany proposes substantial VAT rate reduction, tax loss carryback expansion - June 10, 2020
- Germany advances new EU financial transaction tax proposal - December 16, 2019
- Germany publishes revised tax law requiring disclosure of cross-border transactions - October 1, 2019
- German finance minister endorses public country-by-country reporting of MNE tax information - September 17, 2019
Be the first to comment