14.05.2025Federal tax court decisions clarify conditions for a permanent establishment
Shared office space with designated lockable drawer cabinet was sufficient to establish a permanent establishment under Germany-Switzerland double tax treaty
In two decisions both dated 18 December 2024 (and published on 2 May 2025), Germany’s federal tax court (BFH) clarified the conditions under which an outbound permanent establishment (PE) exists. In the first decision, the BFH ruled that a shared office space that includes a designated and lockable drawer cabinet was sufficient for establishing a PE under the Germany-Switzerland double tax treaty (DTT). In the second decision, the BFH confirmed that the existence of an outbound PE requires a minimum period of six months where there is both the existence of a fixed place of business and activities at such place through which the business of the company is carried out.
Background
In the first decision, a German resident individual operated a taxi business in Switzerland, which was registered under a Swiss address of an association of independent taxi drivers. The German resident individual was a member of the association. At all times, the German resident individual had access to the premises of the association in Switzerland, which consisted of shared office space and an operations center. The operations center was used by employees of the association. The shared office space was equipped with three desks (with computers, monitors, and telephones), one of which was mainly used by the German resident individual once or twice a week for administrative work (e.g., bookkeeping, tax returns, and other similar work). Within the shared office space, the German resident individual used a lockable drawer cabinet labeled with his (company) name in which business documents and paperwork were kept. Only the German resident individual had a key to this drawer cabinet. The association also maintained a mail address at the nearby post office where the vast majority of the mail for the taxi business of the German resident individual was received. The mail was collected from the post office once a day and then delivered and sorted to separate mail deposit boxes (including one for the German resident individual) at the association’s premises. Besides the German resident individual, two other taxi businesses used the association’s address as their business address, each with their own lockable drawer cabinet and mail deposit box at the same premises.
The German tax authorities were initially of the opinion that there was no PE of the German resident individual in Switzerland and subjected all profits from the taxi business to German income taxation. As a result of a subsequent mutual agreement procedure (MAP), the German tax authorities changed their view and agreed that the activities of the German resident individual resulted in a dependent agency PE in Switzerland (under article 5 (4) of the Germany-Switzerland DTT) and allocated a part of the total profit from the taxi business to the Swiss PE. The German resident individual, however, did not agree with the result of the MAP procedure, arguing that all profits from the taxi business should be allocated to the Swiss PE and, therefore, such profits should be exempt from German income taxation. During the appeals procedure, the lower tax court of Baden-Württemberg concluded that the activities of the German resident individual in Switzerland constitute a PE in Switzerland pursuant to the Germany-Switzerland DTT and that all profits from the taxi business must be allocated to the Swiss PE.
In the second decision, three German resident individuals formed a general partnership in the UK under UK law, with the intention to engage in certain commodity trading activities. The partnership leased office space in the UK from 22 October 2007 to 30 April 2008 and engaged several UK service providers (including secretarial services, courier services, and supply of IT hardware). No employees were hired by the partnership. In the period between September 2007 and April 2008, the German resident individuals were in the UK both on an alternating basis and sometimes together on different days. The partnership carried out trading activities in the period between 13 December 2007 and 15 January 2008; after this last trading activity, the remaining activities were performed in order to wind up the activities in the UK. The German resident individuals argued that the loss from the trading activities in 2007 had to be allocated to a PE in the UK and to be taken into account for German tax purposes when determining the German individual income tax rates of the individuals, resulting in a lower German income tax rate. The German tax authorities argued that no PE in the UK had been established due to the short period of time during which actual trading activities were performed; this position was then confirmed by the lower tax court of Munich.
BFH decision
In the first decision, the BFH confirmed the decision of the lower court of Baden-Württemberg and decided in favor of the taxpayer by reaching the conclusion that a PE had been established in Switzerland and that all profits of the taxi business must be allocated to the Swiss PE. According to the BFH, the shared office space of the association established a fixed place of business for the German resident individual in Switzerland as it was used consistently since 2003, even though only once or twice a week. The German resident individual had unlimited access to the shared office space while being a member of the association. In addition, the BFH found that the shared office space was not just temporarily at the disposal of the German individual due to the existence of a designated and lockable drawer cabinet to which only the German resident individual had a key. In its decision, the BFH highlighted that not the drawer cabinet itself but the shared office space of the association constitutes the fixed place of business for the German resident individual; however, the drawer cabinet was an indication that the fixed place of business (shared office space) was at the disposal of the taxpayer and that the arrangement was not just of a temporary nature. The argument of the tax authorities that the activities in the Swiss PE were only of an auxiliary or a temporary nature were rejected by the BFH on the grounds that the activities were at least partly core activities of the taxi business (e.g., human resources activities, bookkeeping, accounting, monitoring of financial performance, and compliance with regulations). As all activities of the taxpayer’s taxi business took place in Switzerland, all profits of the taxi business must be allocated to the Swiss PE (article 7 (1) of the Germany-Switzerland DTT) and the corresponding income must be exempt from German income taxation based on article 24 (1) (1a) of the Germany-Switzerland DTT.
In the second decision, the BFH confirmed the decision of the lower court of Munich and decided in favor of the German tax authorities by reaching the conclusion that no PE had been established in the UK. In order to establish an outbound PE, a minimum period of six months where there is both the existence of a fixed place of business and activities at such place through which the business of the company is carried out is required. As for the case at hand, the business activity was intended to last less than six months (and actually lasted less than six months). The BFH concluded that the minimum period had not been reached and, therefore, no PE had been established in the UK. The BFH confirmed that activities that are required to wind down a business and that are performed with the goal to exit the respective jurisdiction generally do not count towards the required minimum period of six months for establishing a PE. No exception to this minimum six-month period is justifiable, according to the BFH, even if the entire business activity is carried out through a foreign place of business.
Comments
The first decision of the BFH is in line with previous BFH decisions that show a trend towards broadening the interpretation of sufficient nexus in a PE context. In a previous decision from 2023 (see GTLN dated 09/11/23), the BFH decided in an inbound context that the use of a designated locker for storage of personal clothing and items was sufficient nexus to create a PE under German domestic PE rules. In the decision at hand, the BFH applied similar considerations to an outbound PE context under an applicable DTT.
Even though the decision gives additional insights into what is considered nexus in the outbound PE context, it remains unclear whether the same conclusion would have been reached by the BFH without the German resident individual having a designated and lockable drawer cabinet in the shared office space to which only he had the key to. Nevertheless, the decision shows that the threshold to create a PE for German tax purposes in an inbound as well as outbound context can be low, in particular if designated and lockable space (e.g., designated locker or drawer cabinet) is available. Careful analysis is required, since a weak nexus could result in the creation of a PE.
The second decision of the BFH confirms the requirement of a minimum period of six months for the existence of a fixed place of business and actual activities therein for the creation of a PE in an outbound context based on DTT principles. It would be interesting to see whether the same principles would have been applied in the case of an inbound PE.
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