Conditions for a permanent establishment under tax treaty law

 

For internationally active companies, the permanent establishment represents the decisive intensity threshold for taxation in the respective country; numerous regulations are based on this. Accordingly, there are frequent disputes between companies and tax authorities as to which relevant criteria constitute a permanent establishment. In its decision dated December 18, 2024 (case no. I R 47/21) the German Federal Fiscal Court (Bundesfinanzhof, BFH) had the opportunity to decide on key aspects of a permanent establishment and thus provide further legal certainty. 

A taxpayer resident in Germany operated a cab company with several employed drivers exclusively in Switzerland in the years in dispute 2009 and 2010. As a member of a Swiss cab cooperative, he had permanent access to an appropriately equipped workstation with a stand container accessible only to him for his office work. There, he prepared the accounts and Swiss tax returns and carried out other office work that was exclusively necessary for his job. The income from the cab business was taxed there in view of the cab activities carried out in Switzerland. In addition, the tax office also subjected the profits generated to taxation in Germany. It did not consider Switzerland to be a permanent establishment, meaning that the cab operator ran his business from his private residence in Germany and was therefore also liable for tax in this respect. The fiscal court and BFH disagreed.

The relevant criterion for a permanent establishment under tax treaty law in the case in dispute is the “fixed place of business”. However, this is not defined by the DBA-Switzerland, so that the BFH refers back to its case law on “fixed place of business or installation” in Section 12 AO. According to this, a permanent establishment requires physical objects with a fixed relationship (connection) to the earth's surface that is of a certain duration. Furthermore, the entrepreneur must have sufficient power of disposal over the facility so that it can also be allocated to his business. The BFH expressly clarifies that these criteria cannot be considered in isolation, but are subject to mutual interaction and that particular characteristics of one feature can also be indicative of another. It also refers to its previous case law, according to which as part of a comprehensive overall assessment of the specific circumstances of the individual case, taking into account the characteristics of the temporal and local stability of the business facility and the company's power of disposal over this business facility, it must be decided whether the company is sufficiently ‘rooted’ in the place where the business activity is carried out.

This was the case in the dispute, especially since, contrary to the tax office's assumption, it was not only the cab operator's stand container that was to be considered, but the entire office space. This was because the cab cooperative had also always granted him a legally independent right of joint use for his own business activities. The fact that the cab operator was not assigned a specific workplace for exclusive use but merely had a right of joint use for the office and all of its equipment, was ultimately irrelevant. Due to the limited number of co-users of the office space, he had the opportunity to use a workstation at any time to carry out his activities. In addition, the permanence of the power of disposal had manifested itself in the personal usage structure of a free-standing container that had been left exclusively to him and labeled accordingly.

However, it is not sufficient for a fixed place of business and thus also a permanent establishment if only activities of a preparatory nature or auxiliary activities are carried out there (see Art. 5 para. 3 e DBA-Switzerland). At the very least, parts of the main activity derived from the object of the company must be performed there. This may also include activities that do not directly serve the production of goods or the provision of services, but which relate to central business functions. For example, the main activity of a cab company with several employed cab drivers does not only include driving cabs for the purpose of transporting passengers, but also necessary business management and central business administration activities such as personnel administration, preparation of current company accounting, monitoring of the financial system and ensuring compliance with official, profession-specific, company requirements.

Accordingly, in the case in dispute, the cab operator had a - sole - permanent establishment in Switzerland. The commercial income generated from this was fully exempt from domestic taxation in Germany under the DBA-Switzerland and was only to be considered within the framework of the so-called progression proviso.