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Germany: New ordinance on the 'attribution of income to permanent establishments' published

Under the 'Authorised OECD Approach' (AOA) the profit attributed to a permanent establishment (PE) should be in line with what the PE would have earned under arm's length conditions, i.e. as if it were a separate and independent entity, engaged in the same or similar activities, under similar circumstances. In doing so, the functions performed, the risks assumed and the assets employed should be taken into consideration. This idea was implemented within the 2010 update of the OECD Model Convention. The OECD’s intention was to achieve a higher level of legal certainty and to harmonise the differing rules among the OECD countries on profit attribution to PEs.

In Germany, the concept of the AOA had already been implemented in its Foreign Tax Act (Außensteuergesetz) in 2013. In addition to this, the German Federal Ministry of Finance published a new ordinance on the attribution of income to PEs on 13 October 2014. The ordinance contains detailed rules on how to determine functions of a PE and how to allocate the respective assets, risks and capital. In general, Germany follows the regulations stipulated in the 2010 OECD report as well as the commentary to Art. 7 of the OECD Model Convention.
Nevertheless, there are some significant differences. The most important are:

  • Germany applies different methods to attribute 'free capital' to a PE, depending on whether it is an outbound PE ('Thin Capitalisation Approach') or an inbound PE ('Capital Allocation Approach').
  • Germany has introduced special rules for building site or construction PEs, that contain simplifications which have not been coordinated with the other OECD Member States. 

As a result, this might lead to double taxation as the above mentioned rules are inconsistent with the OECD positions. Notably, in a first step, Germany applies its approach even when a double tax treaty (DTT) is in place that has already implemented the AOA. Only to the extent the taxpayer can prove that this treatment would lead to double taxation, Germany grants in a second step an 'old' treaty precedence (escape clause). However, until now there is no specification how to provide this proof. In case there is no DTT at all, Germany follows the AOA without limitation. So far only a few of the more recent German DTTs, e.g. with the Netherlands, Luxembourg and Liechtenstein include regulations complying with the AOA.

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