A German taxpayer had established a partnership in London in September 2007 to conduct commercial gold trading. The partnership rented office space with two workstations, used business centre services and entered into financing arrangements with a Swiss bank. It also carried out a series of physical and securitised gold transactions, as well as hedging and currency transactions. Trading activity began at the end of October 2007 and had largely ceased by mid-January 2008. The business was sold in October 2008, after which the partnership was dissolved.
The tax authorities took the position that the income from the gold trading activity was not attributable to a permanent establishment in the United Kingdom. They argued that, although office premises had been rented and business activities had been carried out there, the temporal requirement for a permanent establishment under the Germany-United Kingdom tax treaty had not been met. Consequently, the income could not be treated as exempt foreign business income under the treaty and remained taxable in Germany, including for progression purposes.
The taxpayers challenged this view, arguing that the London office constituted a permanent establishment as business activities were carried out there with sufficient connection to the United Kingdom. They contended that the existence of rented office space, a repeated presence in London and the actual execution of trading activities should be sufficient, even though the duration of the activities was relatively short overall.
Judgment
The Federal Finance Court dismissed the appeal and upheld the Finance Court’s decision. It confirmed that, under treaty law, a permanent establishment generally requires a minimum duration of more than six months, and that this temporal requirement applies to both the existence of the business facility and the business activity carried out there. The Court held that the gold trading activity did not meet this minimum duration since it was neither planned nor carried out for more than six months. Furthermore, the winding up of the business could not be used to artificially extend the period. Accordingly, no permanent establishment existed in the United Kingdom, meaning the income was not exempt from German taxation.
Excerpt in English
“23 d) Based on the findings of the FG, according to which the business activity (gold trading) was not planned for a period of more than six months and actually ended in mid-January 2008, the basic minimum duration of six months is not fulfilled in the case in dispute and the assumption of a permanent establishment in the United Kingdom is therefore ruled out.
24 Whether the start of the period should be based on the conclusion of the lease agreement on 18 September 2007 or only on the date specified in the lease agreement, 22 October 2007 (and what significance the use of a ‘virtual office’ before 22 October 2007 has for this period) can be left open under these circumstances. The same applies to the question of whether the expected (according to Wassermeyer/Kaeser in Wassermeyer MA Art. 5 Rz 37a; Fresch/Strunk in Strunk/Kaminski/Köhler, AStG/DBA, Art. 5 Rz 54) or (only) the actual (according to Görl/Gradl in Vogel/Lehner, DBA, 7th ed., Art. 5 Rz 37) duration of the business activity should be taken into account. In any case, the minimum duration of six months is not met on the basis of the FG’s findings.
25 e) The FG also rightly ruled that an overall assessment of the specific circumstances of the case does not justify an exception to the six-month period.”
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