Requirements for the creation of permanent establishment in Germany.

• Author: Urbahns, Rudiger

The Bundesfinanzhof, Germany's federal tax court, ruled in a recent decision that use of business premises or a plant does not constitute a permanent establishment under [section] 12 of the Abgabenordnung (general tax code), subject to taxation in Germany, when the foreign company does not have certain authority over the business premises or plant in which it operates (Bundesfinanzhof, June 4, 2008, IR 30/07, published September 10, 2008). The Bundesfinanzhof clarified, in distinction from previous rulings, that it is not sufficient for the creation of a permanent establishment if the foreign company just conducts its operations on the premises of a German enterprise, even if the activity continues for several years.

Background

In 2004, the Bundesfinanzhof (July 14, 2004, IR 106/03) held that a U.S. enterprise created a permanent establishment in Germany when it used premises provided to it for conducting its business. In this case, a U.S. company provided training over several years to U.S. army personnel on using defense systems installed at a U.S. army base in Germany. The Bundesfinanzhof held that the U.S. enterprise had certain authority over the premises, which led to the conclusion that a de facto lease agreement was established in connection with the service agreement.

In contrast to the 2004 decision, the Bundesfinanzhof held in IR 30/07 that a Dutch enterprise cleaning aircraft on the premises of a NATO air base in Germany is not deemed to have created a permanent establishment in Germany. The Dutch company was a subcontractor for cleaning services and employed several workers who had access to the air base premises (including identification cards and keys to recreation rooms and working space with telephone and fax facilities).

In this case, the Bundesfinanzhof held that it is not sufficient to create a permanent establishment if a foreign enterprise is just conducting its business on the premises of a German enterprise when fulfilling its service obligations. To create a permanent establishment, it must also be a lessee or, without having a separate lease agreement in place, at least be in the position of a de facto lessee, which comes close to such a lease agreement. A de facto lessee would have possessory...