New German regulations on profit allocation to permanent establishments

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from Transfer Pricing
Tax Controversy and Dispute Resolution
New German regulations on profit
allocation to permanent
establishments
November 3, 2014
In brief
The Upper House of the German Parliament (Bundesrat) has consented to the Federal Ministry of
Finance’s (Bundesministerium der Finanzen’s [BMF]) final version of its regulations on the application
of the arm’s length principle to profit allocations between head office and permanent establishments (PE
Regulations) on October 10, 2014. These have been published in the Federal Law Gazette
(Bundesgesetzblatt [BGBl.]) on October 17, 2014 and are in force now, but will be applied financial years
starting after December 31, 2014.
The PE Regulations are binding on taxpayers, the tax administration and tax courts. They provide
detailed rules on the application of the “Authorized OECD Approach” (AOA) and thus should help
taxpayers in applying the AOA in practice. The AOA itself has already been enacted with effect from 2013.
In detail
International background in
brief summary
On July 22, 2010, the
Organisation for Economic Cooperation and Development
(OECD) published a revised
version of its “Model Tax
Convention on Income and on
Capital” (Model Convention or
OECD-MTC 2010).1 Within the
update process, the OECD
especially focused on modifying
the principles of profit
allocation between permanent
establishments and head offices
as stipulated in Article 7 of the
Model Convention, following
the so-called AOA. This
approach generally aims at
defining international rules on
the allocation of profits between
head office and permanent
establishments, assuming the
latter would act as a quasiseparate legal entity.
The OECD developed the AOA
in the decade following the
modification of its commentary
on Article 7 of the Model
Convention (Model
Commentary) in 1994, because
this revision did not lead to
standardization in the
international application and
interpretation of Article 7
OECD-MTC 2010. The OECD’s
considerations and views were
aggregated and published
within the OECD’s “Report on
the Attribution of Profits to
Permanent Establishments,”
released on July 17, 2008,2
before being adopted into both
the Model Commentary, in
2008, and the Model
Convention, in 2010.
Subsequent legal
developments in Germany
Under German law, Article 7
Paragraph 2 of the Model
Convention — as well as
analogous regulations in
Germany’s (new) double
taxation treaties3 — only
qualifies as a permissive or
limitative regulation, and does
not have a “self-executing
effect”. As a result, Article 7
OECD-MTC 2010 and, thus, the
AOA are not immediately
applicable in Germany. The
German legislator therefore had
to explicitly “transform” this
approach into German law.
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The originally intended
implementation of the AOA through
the Annual Tax Act 2013
(Jahressteuergesetz 2013) failed, with
the legislator finally implementing it
in June 2013 through the
Administrative Assistance Directive
Implementation Act
(AmtshilferichtlinieUmsetzungsgesetz)4 by modifying
Section 1 of the Foreign Tax Act
(Außensteuergesetz).5 While Section 1
Paragraph 4 of the Foreign Tax Act
now treats dealings between
headquarters and permanent
establishments as business
relationships for the purposes of
income allocation, Paragraph 5 (in
combination with Paragraph 1)
contains regulations substantially
corresponding to the AOA.
Furthermore, Section 1 Paragraph 6 of
the Foreign Tax Act allows the BMF to
set out detailed regulations to ensure
the consistent application of the arm’s
length principle in cases of profit
allocations between head office and
permanent establishments. These
regulations require the consent of the
German Bundesrat before they can
come into force.
Permanent establishment
regulations by the BMF
On August 3, 2013, the Ministry of
Finance published a first draft of the
regulations — the so-called
“Betriebsstättengewinnaufteilungsve
rordnung” (BsGaV)6 — containing
regulations on several issues related to
the application of the arm’s length
principle in such cases of profit
allocation and offering the possibility
to comment on the draft regulations.
After a year of discussion and further
analysis, a final version of the
Ministry’s regulations were provided
to the German Bundesrat on August
28, 2014, and have now received
2
consent. The regulations mainly deal
with:
 general principles regarding the
identification of significant people
functions;
 general principles regarding the
allocation of tangible and
intangible assets, opportunities
and risks, capital and liabilities as
well as external transactions;
 general principles regarding the
determination of dealings;
 the obligation to prepare ancillary
PE accounts to calculate/
determine a permanent
establishment’s income (“Hilfsund Nebenrechnung”);
 specific regulations for certain
industries, e.g. banks, insurance
companies, building &
construction companies, mining
companies or mineral oil/ natural
gas companies; and
 specific regulations for dependent
agent PEs.
The takeaway
More than four years after the OECD
provided its 2010 update on the
Model Convention, presenting a
modified version of Article 7, the
German legislator has now finalized
regulations for implementing the AOA
into national tax law.
recognition that taxpayers had no
guidance as to how they should treat
the allocation of profits to PEs under
the AOA. However, a tax auditor may
decide to estimate the tax base of a
permanent establishment in order to
assess documentation and latesubmission penalties if the
documentation for the years before
2015 does not cover the allocation of
people functions, assets, dealings, etc.,
or is not submitted on time.
Multinational enterprises with
German operations have to apply the
Ministry’s interpretations regarding
profit allocation aspects for their
permanent establishments.
Importantly, taxpayers have to decide
on the nature of the activity they want
to have between head office and
permanent establishments, and
document it. If taxpayers do not
document their position then if might
be expected that the German tax office
will take their own views on the nature
of the relationship between the head
office and permanent establishment,
and tax the German end of the
transaction accordingly. Taxpayers
should therefore prepare for such
discussions in future tax audits, as
profit allocation issues involving
permanents establishments might be
expected to be increasingly on the tax
agenda for future German tax audits.
Whilst the regulations provide
taxpayers with detailed guidance on
how they should implement the AOA,
the new regulations are not legally
binding for financial years ending on
or before December 31, 2014. As a
result it is anticipated that the
German tax administration will take a
pragmatic approach to the application
of the AOA for earlier years in
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Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
Transfer Pricing and Tax Controversy
Susann van der Ham, Düsseldorf
+49 211 981 7451
[email protected]
Dr. Ulf Andresen, Frankfurt
+49 69 9585 3551
[email protected]
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Endnotes
1.
2.
3.
4.
5.
6.
4
Available under: http://www.oecd.org/tax/treaties/oecd-model-tax-convention-available-products.htm.
Available under: http://www.oecd.org/tax/transfer-pricing/41031455.pdf.
Among others, Germany’s new double taxation treaties with United Kingdom, Luxembourg, Liechtenstein, the Netherlands
and Norway.
“Gesetz zur Umsetzung der Amtshilferichtlinie sowie zur Änderung steuerlicher Vorschriften (AmtshilferichtlinieUmsetzungsgesetz – AmtshilfeRLUmsG)“, BGBl. I 2013, 1809
“Gesetz über die Besteuerung bei Auslandsbeziehungen (Außensteuergesetz)” (“Foreign Tax Act”), originally published in
BGBl. I I 1972, 1713.
“Verordnung zur Anwendung des Fremdvergleichsgrundsatzes auf Betriebsstätten nach § 1 Absatz 5 des Außensteuergesetzes
(Betriebsstättengewinnaufteilungsverordnung – BsGaV)”, BGBl. I 2014, 1603.
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