A Hungarian company had a permanent establishment (PE) in Germany. The PE provided installation and assembly services to third parties in Germany.
Following an audit of the German PE for FY 2017 the German tax authorities issued an assessment of additional taxabel income calculated based on the cost-plus method, cf. section 32 of the BsGaV (German ordinance on allocation of profits to permanent establishments).
Not satisfied with the assessment a complaint was filed by the taxpayer with the Tax Court, which later decided in favour of the PE and set aside the tax assessment.
An appeal was then filed by the tax authorities with the Federal Tax Court.
Judgment
The Federal Tax Court upheld the decision of the Tax Court and ruled in favour of the PE.
Excerpt in English
“1. It already follows from the wording of Section 1(5) sentence 1 of the Foreign Tax Act (AStG), according to which paragraphs 1, 3 and 4 on the ‘correction of income’ are to be applied mutatis mutandis, that Section 1( 5 AStG is a provision for the correction of income and not an independent provision for determining the profits of a permanent establishment. Therefore, § 1 (5) sentence 1 AStG in conjunction with Section 32(1) sentence 2 of the Permanent Establishment Profit Allocation Ordinance (BsGaV) does not justify rejecting a causally related determination of profits of a dependent permanent establishment within the scope of the limited tax liability of a foreign corporation without further investigation and replacing it with a determination of profits based on a cost-oriented transfer pricing method (known as the cost surcharge method).
2. The reduction in income required by section 1(5) sentence 1 of the AStG must – as a causal condition – arise ‘through’ the agreement of conditions (transfer prices) that are not in line with the arm’s length principle and is not deemed to exist either by section 1(4) sentence 1 no. 2 of the AStG or by section 32 of the BsGaV.”
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