In 2011 a permanent establishment (PE) of a Danish company was established for income tax purposes in Germany in the form of an offshore wind farm. The PE had no employees of its own either in Germany or in Denmark. The technical and commercial management was carried out by two German service and management companies on the basis of management and service contracts.
In 2013 the tax authorities issued an assessment related to taxation of assets which, according to allocation principles in the new AOA (significant people functions), would no longer be allocated to Germany.
The tax authorities held that allocation of assets to the permanent establishment is determined on the basis of personnel functions exercised in the permanent establishment. If no personnel functions were carried out in the permanent establishment no assets were to be allocated to it. In the tax authorities view, this meant that the wind turbines previously allocated to the domestic permanent establishment as of 1 January 2013 would instead be allocated to the shareholder in Denmark. Due to this (new) allocation of the wind turbine, there was a transfer of assets. Consequently, withdrawal “for non-business purposes” within the meaning of § 4 para. 1 sentence 2 EStG was to be assumed, which was to be recognised at the fair market value of the withdrawn assets.
An appeal was filed with the court.
Judgement of the BFH
The BFH clarified that Section 1 (5) AStG actually requires a reduction in income due to prices that are not at arm’s length in internal business relationships, so-called dealings, and that the allocation regulations of the income correction regulation in Section 1 (5) AStG have no spillover effect on the profit determination regulation of § 4 para. 1 sentence 3 EStG.
“Insofar as the tax authorities assume in paragraph 184.108.40.206 of the BMF letter on the application of double taxation agreements to partnerships of 26 September 2014 (BStBl I 2014, 1258) that, with regard to the allocation of assets of a partnership, the principles of § 1 para. 5 AStG are “broadly consistent” with the case law of the BFH on the functional relationship, there are already doubts as to whether, within the framework of such an approach, the allocation of assets would have to be based solely on “personnel functions”. The previous case law of the Senate on this may be based on a function-based approach, but in any case it cannot be inferred that the personnel function alone would be regarded as the decisive allocation parameter”
“Even if, with reference to § 1 (5) AStG, the decisive factor were to be the allocation of assets according to the “personnel function”, there are doubts as to whether, in the case in dispute, the wind turbines would have to be allocated to the management permanent establishment in Denmark because personnel functions are only exercised there. This is because it is questionable whether § 1 (5) sentence 3 AStG is to be interpreted to the effect that the relevant personnel function can only be exercised by personnel who are employed by the company as (its own) employees. In any case, the literature doubts that the personnel working in a function for the enterprise must be connected to the enterprise by an employment contract. The wording of the standard does not exclude personnel who work in this function by means of an employee leasing contract or a service contract (Andresen in Wassermeyer/Andresen/Ditz, loc.cit., margin no. 4.70). Thus, in the case in dispute, the personnel of the German service or management companies, who take over the technical and commercial management of the wind turbines on the basis of management and service contracts, would exercise a function in the domestic permanent establishment for the allocation of assets. Consequently, a personnel function would have to be assumed there”
“Finally, the Senate has doubts as to whether the principles on the allocation of assets according to the personnel function are applicable at all for so-called permanent establishments without personnel under the validity of Section 1 (5) AStG. The literature points out that the principle of allocating assets according to the personnel function in such permanent establishments would result in the assets that establish the permanent establishment without personnel being allocated to the management permanent establishment…………….
It is therefore considered necessary that in the case of permanent establishments without personnel — in deviation from the allocation according to the relevant personnel function — the assets that they establish and that ultimately serve the business function performed there must be attributed to them ”
In any case, the tax authorities appear to support the case of a permanent establishment without a significant personnel function with reference to paragraph 75 of the OECD report on the attribution of profits to permanent establishments of 22 July 2010………, according to which, in the case of permanent establishments without a decisive personnel function, the use is to serve as the basis for the allocation of the economic ownership of tangible assets, a “different” allocation of assets is to be assumed ……. which, however, is again not beyond doubt in view of the ambiguous wording of the law (“belonging … to the enterprise”).