A Hungarian company had a permanent establishment (PE) in Germany. The PE carried out meat cutting work on the basis of work contracts dated 23 February 2017 with the Hungarian company Z Kft.
The PE concluded a service agreement with A Kft. in which A Kft. undertook to provide administrative services in the area of support for employees in Germany and was to receive a fee calculated as a percentage of net sales in return.
Following an audit of the PE the German tax authorities issued an assessment of additional taxabel income based on the German ordinance on allocation of profits to permanent establishments. In the assessment the service fee was instead determined using the cost plus method.
Not satisfied with the assessment a complaint was filed by the PE with the Tax Court. In its complaint the PE argued that the tax authorities corrected all of the PE’s sales in Germany without a corresponding legal basis. Contrary to the opinion of the tax authorities, the BsGaV does not constitute a legal basis for a profit correction. In particular, the profit determinations contained in § 30 et seq. BsGaV are not covered by Section 1 of the AStG.
The Court 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 mostly upheld the decision of the Tax Court. The court ruled that the German tax authorities could not reject the profits declared by German permanent establishments based on section 1(5) AStG, without thorough examination and further reasoning.
Excerpt in English
“Although the plaintiff based its tax returns for the years in dispute on an independent, cause-related determination of profits for its domestic permanent establishment (on this fundamental legal standard for the allocation of income under national law [Section 2 No. 1 of the Corporation Tax Act in conjunction with Section 49(1)(2)(a) of the Income Tax Act in the version applicable to the years in dispute [….] the tax office rejected this calculation without further examination, merely referring to section 1(5) sentence 1 in conjunction with para. 4 sentence 1 no. 2 AStG and § 16 BsGaV and determined the profit to be assessed on the basis of the cost-oriented transfer pricing method (‘cost plus’ with 5% of personnel expenses in the broader sense) regulated in § 16 para. 2 BsGaV. The Senate can leave open whether the details on profit allocation set out in the Permanent Establishment Profit Allocation Regulation are fully covered by the enabling provision in Section 1(6) AStG. In any case, § 1 (5) sentence 1 AStG in conjunction with § 16 (2) BsGaV does not provide a sufficient legal basis in the case in dispute for completely rejecting a causation-based determination of profits and replacing it exclusively with a ‘determination of profits’ based on the so-called cost plus method as a cost-oriented transfer pricing method (permanent establishment as a ‘routine enterprise’, even though the plaintiff’s core operating business is performed for the customer of the entire enterprise [correctly Kudert, PIStB 2024, 191, 198]) for limited tax liability.”
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