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How is a Permanent Establishment Defined in Germany?

November 27, 2023

From AGN EMEA Tax Committee members and AGN tax correspondents

Permanent Establishment and Fixed Business Facility for Service Providers in Germany: A foreign company operating in Germany must be assessed from a tax perspective to decide whether the establishment is a ‘permanent establishment’ or not. The existence of a permanent establishment has various consequences, especially Germany’s right to tax the income attributable to the permanent establishment in Germany.

According to the German law, a permanent establishment in Germany has to meet the following requirements:

1. A fixed place of business or permanent establishment of a certain duration;
2. Over which the entrepreneur has not only temporary power of disposal;
3. And which serves the activity of the company.

There must, therefore, be a certain rootedness of the activity in Germany. These requirements are more or less decisive under treaty law.

Decision of the Federal Fiscal Court

On June 7, 2023, the German Federal Fiscal Court (Bundesfinanzhof) issued an interesting judgment – A decision by the Federal Fiscal Court ruled that a UK resident individual’s use of a designated locker for personal clothing and items in connection with the provision of aircraft maintenance services at a German airport, even if not used to store tools or other business equipment, was a sufficient nexus to create a permanent establishment under domestic legislation and the Germany-UK tax treaty.

Case Overview:

The case in question was an engineer from the UK carrying out maintenance work on an aircraft at an airport site in Germany. The maintenance work was carried out under a contract between the engineer and A GmbH (owner of the airport site).

As part of his work on the airport premises, the engineer had a lockable locker with a name tag to store his private belongings. The documentation of the work carried out on the aircraft was recorded in the aircraft’s log book in a room equipped with computers, which the engineer was allowed to use.

The dispute was whether the use of a locker in an airport’s common areas is sufficient to assume that the activity is rooted in Germany to a certain extent. At the entrance to the building, the employee had to undergo a security check, after which he could move freely around the airport premises.

According to the judgment, the requirements for a permanent establishment are met if a service provider (in the judgment: an aircraft mechanic) was provided with restricted personal use

structures at location-related business facilities (in the judgment: locker and safety deposit box in common rooms on the airport premises) in connection with the provision of the service (in the ruling: maintenance work on aircraft).

The recent judgement shows that German case law interprets a strict requirement of how a permanent establishment’s activities are defined in Germany. In practice, it will therefore be even more important in the future that the requirements for a permanent establishment are checked in detail for activities in Germany.

In our experience, these disclosure requirements have not been given the attention they require within the accounting profession. They now need to be considered as a matter of course when dealing with cross-border issues and even more so when it involves an EU Member State when the additional Hallmarks of the EU Directive will also need to be considered.

Christine Ries
Tax Consultant | Certified Advisor in International Taxation
WirtschaftsTreuhand GmbH