September 20, 2022

Trade tax liability of a real estate GmbH when a service company is involved?

 

The Federal Fiscal Court (Bundesfinanzhof, BFH) recently dealt with the question of whether a domestic real estate company establishes a permanent establishment in Germany that leads to a trade tax liability if certain activities are transferred from the owner of the real estate to a service company. Especially for foreign investors, this question often plays a decisive role with regard to the return from the investment properties.


The ruling case deals with a domestic, purely asset-managing limited liability company whose main shareholder and sole managing director was resident in Luxembourg and which had not moved into its own business premises. The limited liability company owned a residential and commercial building in Germany from which it generated rental income. By involving a domestic service company, which was equipped with a far-reaching "property management power of attorney", the GmbH had outsourced all rights and obligations in connection with the letting, which included, for example, the new conclusion and termination of rental agreements. The tax office assumed a domestic permanent establishment of the GmbH in the premises of the service company and consequently set a trade tax assessment amount.

Establishment of a permanent establishment for trade tax purposes

According to section 12 sentence 1 of the German Fiscal Code (AO), a permanent establishment is any fixed business facility or installation that serves the activities of an enterprise. The business facility/plant must have a fixed relationship to the earth's surface, be of a certain duration and the taxpayer must have a power of disposal that is not merely temporary. The criterion of a not merely temporary power of disposal requires a legal position of the entrepreneur that cannot be withdrawn or changed without his cooperation. The mere joint use or the actual possibility of using a property is generally not sufficient to establish a permanent establishment.

Under certain conditions, premises of a third party may also be a permanent establishment of the entrepreneur, provided that he is legally entitled to use the facility according to his needs and if it "serves" his entrepreneurial activity, for example, if own employees are employed there who are subject to the instructions of the entrepreneur.

Federal Fiscal Court sets further criteria

The Federal Fiscal Court (Bundesfinanzhof) ruled on 23 March 2022 that the tax office wrongly assumed a permanent establishment for trade tax purposes in the case of the judgement due to the lack of economic links between the GmbH and the service company. The mere assignment of tasks, even comprehensive ones, without at the same time developing one's own business activities on site, is not supposed to make a permanent establishment of the contractor a permanent establishment of the principal.

In the case of the commissioning or involvement of a service company, a permanent establishment is only to be assumed if the company is able to carry out its business activities at the location of the service company due to the material and personnel structure provided. The criteria mentioned are continuous and sustained supervision or actual power of disposal over the premises of the third party. If this is lacking, the identity of the persons in the management bodies is considered an important indication for the establishment of a permanent establishment.

If there is no identity of persons among the management bodies, own operational activities with a certain sustainability in the contractor's premises are taken as the central decision criterion. In this way, it should be possible to establish a spatial and temporal rooting of the enterprise with the place of performance of the entrepreneurial activity in the premises of the third party. Monitoring activities that are merely carried out from abroad are not sufficient.

Design potential especially for foreign investors

The reasoning of the ruling suggests that a rental property in Germany that is managed by a domestic service company is only likely to lead to a domestic permanent establishment of the client in exceptional cases or if there is a close economic and personnel link. Against this background, the ruling is to be welcomed, as a trade tax liability in Germany can often be avoided if the criteria described are observed. In this case, if the investor is a corporation, the income from the rental is only subject to corporate income tax (plus solidarity surcharge) in Germany, i.e. a tax burden of just under 16%.

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