There are several possibilities to do business in Germany. Either one forms a German company that takes care of the domestic business. Alternatively, foreign businesses can operate through so-called permanent establishments in Germany.
Do I have a permanent German establishment?
A rather difficult question is, at what time “doing business in Germany” becomes a permanent establishment. According to German law, a permanent establishment shall mean any fixed place of business or facility serving the business of an enterprise. In particular, the following is considered to be a permanent establishment:
– the place of business management,
– factories or workshops,
– purchasing offices or sales outlets,
– mines, quarries or other stationary, moving or floating facilities for the exploitation of natural resources,
– building sites or constructions or installation projects, including those moving or floating, where (1) an individual building site or construction or installation project, or (2) one of several coexistent building sites or constructions or installation projects, or (3) a number of immediately successive building sites or constructions or installation projects last(s) more than six months.
Even a Hotel room can become a permanent establishment! Therefore, there is great uncertainty whether or not specific actions etc. constitute a permanent establishment or not.
Complex profit allocation regulations
In case there is a permanent establishment, a complicated mechanism of allocation and documentation of profit, losses and people is set in motion. Under the German Regulations Regarding the Documentation of Profit Allocations (GaufzV) and the Profit Allocation Regulation for Permanent Establishments (BsGaV) the respective business has to observe a variety of mostly unknown rules. The allocation of people’s functions between permanent establishment and the head office can be very challenging in particular and should not be undertaken without obtaining expert advice.
A permanent representative equals a permanent establishment in Germany
Also, a permanent representative who conducts the business of an enterprise in a sustained manner and, in so doing, is subject to its instructions, is treated as a permanent establishment. In particular, permanent representative shall mean any person who, in a sustained manner, on behalf of an enterprise,
– concludes or brokers contracts or solicits orders, or
– maintains a stock of goods or merchandise and makes deliveries from this stock.
Tax authorities go as far as assuming that shareholders of foreign companies living in Germany can be regarded as a permanent representative of the company. This, of course, is highly disputed and often leads to discussions and lawsuits against the tax authorities.
Double Tax Treaties apply
Furthermore, if a permanent establishment is constituted, Double Tax Treaties between the respective countries (if there are any) apply. Generally, under the Double Tax Treaty regulations the profit of a permanent establishment is only taxed in the state where the permanent establishment is placed.
The entrepreneur is obligated to file tax returns. This is why the allocation of profit and losses between permanent establishment and head office is of utmost importance. In Germany, issues with the tax authorities often arise with regard to the allocation mechanisms.
Advice on permanent establishments in Germany
Therefore, it is prudent to obtain professional advice with regard to taxation and permanent establishments and/or permanent representatives to avoid any inconveniences. Our experts for tax law will be pleased to help you.