#Fiscal Court Changes On Subsidiaries In Germany

The Federal Fiscal Court of Germany (BFH) has made some interesting changes to previous practice with regard to subsidiaries.

The managing director of a corporation can be a permanent representative – within the meaning of Section 13 AO. And thus a limited corporate income tax liability of the foreign company even if it does not have a permanent establishment in Germany.

The Federal Fiscal Court of Germany made innovations and, with its decision published on 17.04.2019, ruled on a legal issue that had previously been assessed differently by the tax authorities (BFH, judgment of 23.10.2018, I R 54/16). As a result, a managing director as an organ of the company can now also be a permanent representative. A permanent establishment for tax purposes is created for the company in the country of residence of the managing director.

The company is therefore subject to limited tax liability, with the result that profit determination, submission of tax returns and other obligations must be fulfilled in Germany.

In these cases, there is always the risk of double taxation or the need for an international mutual agreement procedure. international mutual agreement procedure. This is because it cannot always be assumed that the foreign tax authorities share the legal opinion of the German tax authorities.

However, it should be noted that not every foreign managing director who becomes active in Germany is immediately to be regarded as a permanent representative. Rather, the person must conduct the business in Germany on a long-term basis and be subject to the instructions of the company.

If the residence of a managing director and the registered office of the company are in different countries, this could give rise to a (limited) tax liability in the country of residence even earlier – and before the ruling. This is based on the definition of a permanent establishment in the applicable double taxation treaty. If the management has been exercised here due to the factual circumstances (management permanent establishment).

The ruling now extends the starting point for the tax authorities. In our view, however, it will above all lead to increased sensitivity in future tax audits to scrutinize such matters under the aforementioned aspects.

Our recommendation for action
As a result, in such a constellation, the managing director’s stays and activities must be precisely recorded and documented in order to be able to prove – if possible – that the managing director’s activities in the country of residence are of a subordinate nature and are at least not carried out on a sustained basis. If the actual circumstances do not allow this, because the managing director is permanently active for the company in his country of residence and represents it there, we recommend a proactive approach and a registration of the permanent establishment for tax purposes in the country of residence.

The permanent establishment should then be taken into account and documented in the company’s accounts from the outset. Certain measures are required here , which are no longer possible if a retroactive correction is made by the tax audit for several years!

In our view, however, the ruling must also be read in reverse: If there are domestic subsidiaries of foreign companies in Germany with managing directors domiciled and resident abroad, this can lead to a tax liability for the German company abroad.

Are you interested in this topic?
Learn more about this topic and other exciting and related content on the info blog of PBS Pekala and Partner.

You are also welcome to visit the websites of our partner network