In order to allocate the assets of the entire company to the parent company and to the individual establishments, there must therefore also be criteria with which they can be distributed in the company. The criterion is therefore the actual functional approach to the establishment according to DBA. After explaining the criterion of the actual functional approach, the contribution turns to the assignment standard developed by the OECD itself, the Authorized OECD Approach (AOA).

In addition to the distribution standards for the taxation law, there is therefore also a need for allocation criteria, which distribute the assets of the entire company to the parent company and to the permanent establishments of the company located in other states. It is generally accepted that the local location of the asset has in principle no effect on the allocation of premises.[156] In the case of cross-border contributions, the attribution criterion for movable assets is crucial to ensuring income tax neutrality. The transfer-related change of legal entity also changes the parent company of the transferred assets, so that the transferred assets are to be divided again between the permanent establishment and the parent company at the level of the acquiring limited liability company. If a change in the allocation takes place within the scope of the submission, this can lead to tax easing and thus to the refusal of tax neutrality according to § 20 para. 2 S. 2 No. 3 UmwStG.

According to the historical jurisprudence of the RFH[157] in 1935, which was confirmed in 1987 by the BFH[158], the assets were to be distributed between the parent company and the permanent establishment in accordance with the will of the management. The decision-making of the management was regularly expressed in the company’s accounting. According to the BFH, however, the limit of this formation of will was reached when the will was in contradiction with commercial and economic requirements[159], i.e., for example, an abuse of design existed.[160]

Since 1991, BFH has increasingly turned away from this liberal attitude and the associated freedom of management to dispose of its assets,[161] if a different allocation seems more conclusive from an economic point of view. The 1st Senate ruled that the German shareholder of a US LP could not assign his loan claims to the US permanent establishment according to his will and thus exempt the interest income from German taxation. The 1st Senate deprived the taxpayer of his discretion to date on the grounds that the loan claim and the resulting interest income were attributable to the permanent establishment whose purpose they were intended to promote. In further decisions[162], the BFH developed the actual functional approach from this:

2.1 Explanatory note ‘Functional’

“Functional” in this context means that the assets belong to the permanent establishment whose function they are intended to serve. [163] Consequently, the functions performed by a permanent establishment in the context of the enterprise as a whole are analysed and the assets required to perform that function are assigned to it (principle of occasion). [164] For this purpose, BFH allocates to the permanent establishment the assets of the entire enterprise which an independent enterprise requires for the same activity at the same place in order to achieve the same success. [165]

2.2 Explanatory note ‘actual’

“Actual” in this context means that the assignment takes place separately from the legal ownership relationships. This criterion is of particular importance for partnerships. From a tax point of view, partnerships constitute joint permanent establishments of their shareholders.[166] If assets are therefore in the civil property of the partnership, although they are to be assigned to the shareholder on the basis of their functional approach, the actual economic affiliation displaces the legal affiliation. Thus, the assets which are legally located in the assets of the partnership can be economically allocated to the permanent establishment of the shareholder located in the other state. [167] However, this only applies if the shareholder actually maintains a permanent establishment in the other state. Are the requirements of a permanent establishment according to § 12 AO and Art. 5 OECD-MA does not exist in the other state, the assets remain assigned to the permanent establishment of the partnership.[168] Because the criterion "actual" is only in the fallback clauses of the type under agreement law. 10, par. 4, 11 par. 4, 12 par. 3 and 21 par. 1 OECD-MA verbatim, is partly considered that for purposes of the art. 13 para 2 OECD-MA a purely functional approach is sufficient.[169] However, these views disregard the interaction of the above-mentioned fallback clauses with art. 7 OECD-MA on the one hand and the interaction of art. 7 OECD-MA with Art. 13 para 2 OECD-MA, on the other hand.[170] By indirectly linking Art. 10, 11, 12 and 21 OECD-MA with Art. 13, par. 2 OECD-MA therefore, in the opinion here held, the criterion ‘actual’ is to be applied to art. 13 para 2 OECD-MA transferred.[171]

The actual functional allocation also corresponds to the allocation standard of other EU countries[172] and is basically implemented by the permanent establishment management principles introduced by the tax administration on 24.12.1999[173].

The actual functional allocation, however, is not a yardstick by which all the assets of an entire company can be distributed. The remaining assets are those which are not intended to serve any function of a permanent establishment. And there is disagreement about the distribution of these same assets between financial administration on the one hand and literature or jurisprudence on the other. According to the h.L.[174] BFH, with its actual functional approach developed from 1991 onwards,[175] has refrained from its free dispositional freedom applied until then only in those cases in which an assignment according to plant functions is possible. Consequently, the taxable person's freedom of disposition continues to apply to assets which do not serve any function of a permanent establishment. This is not the view of the financial administration. According to them, economic goods that are not distributed according to functional criteria are always attributable to the parent company.[176] According to paragraph 2.1 of the permanent establishment decree[177], the parent company is defined as the permanent establishment in which the business overhead management of the company is located and thus corresponds to the management definition of § 10 AO.

The principle of the central function of the parent company thus effectively excludes a financing, holding and licensing function of the permanent establishments and transfers these functions to the parent company.[178] Also affected by the central function of the parent company are intangible assets – including the goodwill of the company[179] – as well as assets shared by several permanent establishments. [180] If, in the event of a cross-border transfer, the transferor and the acquiring corporation have their places of management and thus also their parent companies in two different states, a new allocation of the non-functionally attributable assets threatens in such cases.[181] Depending on the insertion direction, this can lead to a control or control de-engagement.

3.1. Opinion of the Financial Administration

Since the opinion of the financial administration is not confirmed by the case law, it is criticized in the literature.[182] It must therefore be seriously questioned whether non-functional assets are to be allocated to the parent company on a flat-rate and purely fictitious basis or whether a more convincing scale of distribution cannot be developed from other criteria.[183] Since paragraph 03.20 of the Conversion Tax Decree 2011[184] refers to the permanent establishment management principles[185], the tax administration continues to assume the application of the central function thesis. Although the central function thesis has not yet been confirmed or refuted by case law, it continues to have a practical relevance.

Detached from the assignment standards of the BFH and the financial administration, the OECD has developed its own profit distribution key for corporate profits, the so-called Authorized OECD Approach (AOA). Here, the AOA, which essentially consists of the so-called Functionally Separate Entity Approach, fabricates that operating sites are legally independent and economically independent of the parent company.[186] Accordingly, the OECD adapted the OECD-MK to the new perspective and amended the operating sites article in the context of the recast of the OECD-MA in 2010. According to Art. 7 para. 2 OECD-MA attributable to the permanent establishment is now the profit which it would be expected to make ‘in particular in its economic relations with other parts of the undertaking if it were a separate and independent undertaking carrying on the same or similar activities under the same or similar conditions, taking into account the functions, assets used and risks assumed by the undertaking through the permanent establishment and the other parts of the undertaking’. According to the AOA, each permanent establishment is to be assigned the functions of the company which are performed by the staff of the respective permanent establishment. With this in Art. 7 para. 2 OECD-MA 2010 anchored self-employment fiction – which was maintained unchanged in the OECD-MA 2014 and 2017 – the basis has been created for allocating current income from assets on the basis of personnel functions to a permanent establishment, although the use of the assets takes place in another permanent establishment or in the parent company. The discrepancy between economic attribution and actual use is taken into account by the fact that the assets concerned are transferred to other parts of the company under a fictitious business relationship and fictitious transfer prices are used for this purpose.

The one in the second paragraph of the art. 7 OECD-MA included AOA is immediately applicable only for the distribution of current corporate profits. Consequently, only capital gains that are part of the current business operations – in particular the sale of assets from the inventory assets – are initially recorded. But also the profit from the sale of the remaining working capital is probably in kind. 7 OECD-MA and thus to be distributed according to the AOA.[187] Thus, the AOA has no direct influence on those for art. 13 para 2 OECD-MA assignment of economic goods. Insofar as it is considered in the literature that the loss of the right to tax on current profits leads to a tax easing, this is true, but only concerns the general easing standards (§ 4 para 1 p. 3 EStG, § 12 para 1 KStG). In fact, according to the general de-tricken rules, the exclusion from taxation of the use of an asset, i.e. consequently the exclusion of the right to tax current profits, is also a de-trickling situation (de-trickling of use). [188] In the case of the special de-knitting standards (in particular § 20 para 2 p. 2 no. 3 UmwStG), however, the use de-knitting does not lead to the discovery of hidden reserves. Thus, the AOA is directly only decisive for the de-entangling taxation of working capital.[189] In principle, it would be considered that in working capital, which is traditionally characterised by the fact that it is intended to serve the company only in the short term, there are no substantial hidden reserves.

can accumulate. However, if there is a tax unencumbrance, § 20 para. 2 pp. 1 and 2 UmwStG the approach of the unencumbered assets with their common value. The common value is the price that would be obtained in the ordinary course of trade at a sale, and therefore, in the case of stock, not the purchase price of the goods, but the price of the sale of the goods.

However, the amendment to the OECD MK does not yet lead to a new interpretation of all previously concluded DTAs. Only DTAs[190], in which the new view of the OECD in the form of the model agreement 2010 and 2014 and 2017 is implemented, are accessible to the new interpretation and thus to the AOA. Old agreements are kind of that. 7 para 2 of the OECD-MA 2010, or newly concluded agreement is to be based on this article.[191]

5. income correction according to § 1 para. AStG

Although the AOA was also implemented in § 1 of the AStG and thus in national law within the framework of the Administrative Assistance RDRC of 26.6.2013. However, the AOA implemented in § 1 AStG constitutes only a unilaterally acting correction norm.[192] Only if the income of a limited taxpayer in Germany is to be increased or the foreign income of an unlimited taxpayer is to be reduced (§ 1 para 5 s. 1 AStG), the income correction of § 1 AStG applies. Thus, § 1 AStG secures domestic tax substrate – partly through Treaty Override[193]. If the taxpayer has overstated his domestic income, there will be no correction of income for the benefit of the taxpayer. Different from that in Art. 7 para. 1 AStG thus does not assign the right of taxation to another state, so that no tax easing in accordance with § 20 para. 2 S. 2 No. 3 can threaten UmwStG.[194]

Conclusion 6

Gains on the sale of movable assets are by type. 13 para 2 OECD-MA to be distributed among the parent company and the premises. The decisive factor here is the extent to which the respective establishment was actually involved in the asset formation. For this purpose, each permanent establishment is allocated the assets it needs to perform its incumbent function. Assets which do not serve any function of a permanent establishment may be distributed according to the free disposal option of the management. However, the financial administration continues to assume a central function of the parent company for such assets that cannot be allocated according to functional criteria in its premises administration principles and in particular allocates intangible assets to the respective parent company.

Profits from the sale of assets of current assets (in particular stock assets) are generally to be classified as current corporate profits and consequently in accordance with art. 7 para 2 OECD-MA. Each permanent establishment is entitled to the share of the current profit or the profit from the sale of working capital that it could have earned on the market as a legally separate entity.