An organization exists when a company (so-called organization company) transfers all its profits to another company (the organ carrier) on the basis of a profit transfer agreement. The corresponding definition can also be found in § 14 (1) sentence 1 KStG. The institution shall continue to operate cross-border if at least one of its sub-members, be it the organ carrier or the body, is not established in the country. § 14 (1) sentence 1 no. 2 sentence 4 KStG regulates some requirements for national reference. In this article we explain when the institution has the necessary domestic reference.

1. Requirement of nationality of the institution

The rules on the domestic reference of organs were subject to various reforms. The background to the reforms were decisions of the European Court of Justice (ECJ) and the Federal Finance Court (BFH). According to the ECJ, European law requires the relinquishment of the double national reference for the institution. After double national reference, both the organ carrier and the organ company must be resident in the country. Furthermore, BFH decided on the trade tax organisation that a limited liability company with its registered office in Germany could be the trade tax organisation of a company based in Great Britain.

These decisions gave rise to the concern of the national legislature that organ income of a domestic organ company is attributable to a foreign organ carrier without taxation in the country. This would lead to tax deficits in Germany. We explained why such tax deficits were to be feared in another article.

According to the currently applicable national reference requirements, the participation in the organ company must be attributable to a domestic permanent establishment. A distinction must be made between direct or indirect participation in the organ company. A cross-border body therefore fails not only because of foreign residence, but because the foreign company does not have a domestic establishment. This is compatible with the non-discrimination principle of Article 24(5) OECD-MA.

2 Existence of a domestic establishment

2.1. National reference of the institution in the case of direct participation

According to § 14 (1) sentence 1 no. 2 sentence 4 KStG, the direct participation in the organ company must be attributable uninterruptedly to a domestic permanent establishment within the meaning of § 12 AO of the organ carrier during the entire duration of the organ membership.

2.2. National reference of the institution in the case of indirect participation

If the organ carrier participates only indirectly in the organ company, the participation in the intermediary company of a domestic permanent establishment within the meaning of § 12 AO must be attributable to the organ carrier. This applies mutatis mutandis if the organ carrier holds a stake in the organ company through one or more partnerships. The decisive factor is therefore participation in the intermediary company. It is not decisive whether the organ participation in the intermediary legal entity is arrested in Germany.

2.3 Applicability of the national reference to the institution

The requirements for the national eligibility of organs apply to organ carriers of all legal forms. It is also irrelevant whether these are limited or unlimited taxable organ carriers.

Assignment to any domestic establishment of the organ carrier is sufficient. The change of allocation from one national establishment to another national establishment is irrelevant. The only detriment is the assignment to a foreign establishment. This occurs, for example, if the domestic company is eliminated.

2.4. Definition of the organic establishment

The permanent establishment is, according to the legal definition of § 12 sentence 1 AO, any permanent business establishment or installation which serves the activity of a company. It is located in Germany if it is located within the territory of Germany.

This definition of premises extends § 14 (1) sentence 1 number 2 sentence 7 KStG for organic purposes. A permanent establishment therefore exists only if the income attributable to the permanent establishment is subject to domestic taxation under both domestic law and the law of the double taxation agreements (DTAs). If a DTA is to be observed, the allocation of the organ participation to a permanent establishment and the allocation of income to it depends on the DTA applicable in each case.

An unrestrictedly taxable organ bearer capital company, which holds the shares in the organ company only in an asset management manner and has no power of disposal in a fixed business establishment, also has a management establishment. The reason for this is that, regardless of purely asset management activities, it operates a fictitious business because of §§ 2 (2) GewStG, 8 (2) KStG by virtue of legal form. This maintains a management establishment where the managing director carries out his management measures. If this is done in Germany, the organ carrier has in any case a domestic establishment within the meaning of § 12 AO. This is then also the organ participation. Consequently, domestic asset-management holding companies without their own offices are also eligible for organ support.

3. Functional allocation of participation to permanent establishment

3.1. Pure domestic case

3.1.1. No delimitation problem with foreign permanent establishments

In order for the requirements for the national reference of the organ body to be fulfilled, the organ participation must then also be purely functionally attributable to the present domestic permanent establishment of the organ carrier under national law. It must therefore not be assigned to a foreign permanent establishment.

In a purely domestic case, the unrestrictedly taxable organ carrier maintains only domestic premises. There is therefore no problem with regard to the allocation of organ participation to a domestic establishment as distinct from a foreign establishment. There is no foreign establishment.

3.1.2. Assignment criteria under national law

Nevertheless, the participation must actually come from the permanent establishment and, for example, not from private assets. In the case of the functional allocation of the participation to the specific permanent establishment, a distinction must be made as to whether the sponsor is a capital company or a partnership.

The corporation has, in the absence of an outside sphere, only operating assets. Therefore, the allocation of the organ participation to the permanent establishment of the organ-sponsoring capital company is not problematic.

Partnerships and sole proprietors, on the other hand, have not only operating assets, so that must be differentiated. The shareholding in the organs is attributable to the total assets of a sole proprietorship or partnership if the requirements applicable to the intentional assets are met.

In this respect, the taxpayer has no free choice of allocation. There must be an operational reason for the formation of arbitrary operating assets. The assets must therefore be objectively used to operate the organ carrier. The taxable person must demonstrate the relationship between the asset and the business and the reasonable economic considerations which led him to treat the asset as business assets. In principle, however, organ participation is suitable for strengthening the operating capacity of the organ carrier. It is therefore regularly open to arbitrary allocation of assets. An exception applies only to a permanent loss company.

3.2. Unlimited taxable organ carrier with foreign permanent establishment

3.2.1. Different allocation criteria

An organ carrier who is taxable without restriction in Germany may also maintain additional premises abroad. Then, for the national reference of the institution, it is decisive whether the participation is attributable to the establishment abroad or to the establishment located in the country.

The delimitation is determined by whether the allocation is sufficient according to the principles that apply to necessary and arbitrary operating assets or whether the allocation is to be made according to the actual functional approach. The requirements for the allocation of the asset to a domestic premises in accordance with the actual functional approach are more stringent than those for the formation of arbitrary or necessary assets.

3.2.2. View of the financial management

The tax administration follows the central functional thesis with regard to the allocation of holdings which do not directly serve an activity carried out in the permanent establishment. Thereafter, the participation is regularly attributable to the parent company. This assumption can be refuted.

For unlimited taxpayers with a foreign permanent establishment, this has a simplifying effect. In case of doubt, the participation of the board is then attributable to the domestic management establishment. In principle, therefore, the internal reference of the institution is fulfilled. Only in the case of refutation of this presumption is there attribution to the foreign permanent establishment.

3.2.3 Criteria of § 1 (5) AStG & the Establishment Distribution Ordinance

Whether it remains with this assignment, however, is to be seen. The background is the introduction of § 1(5) AStG and the adoption of the Plant Distribution Ordinance. Also in the literature, the allocation made by the financial administration is viewed critically. It is advocated to allocate participations according to general, functional aspects. The principles of § 1 (5) AStG are in accordance with the basic principles of the case law on the functional relationship. Details on the application of § 1 (5) AStG are governed by the Betriebsstättengewinnteilordnung (BsGaV). The BsGaV assigns income, assets or other things according to the relevant personnel function.

§ 7 BsGaV contains special allocation regulations for investments, financial assets and similar assets. The primary personnel function therefore lies in the use of the participation (§ 7 (1) sentence 1 BsGaV). This results from the functional connection to the business activities of the permanent establishment (§ 7 (1) sentence 2 BsGaV). If there is a functional link to the business activities of different establishments, the allocation to the establishment with which the predominant functional link exists shall be made.

According to § 7(2) BsGaV, a deviation from this allocation rule is to be made if a personnel function other than the fictitious use of the shareholding exercised in the rest of the company is so important that it clearly outweighs the importance of the personnel function. Such predominant personnel functions may include, for example, the acquisition, management, risk management or disposal of the holding. The assignment according to § 7 paragraph 2 BsGaV is necessary, for example, if a concrete functional relationship is not or only difficult to ascertain.

3.2.4. Allocation according to principles for necessary and arbitrary operating assets

In some cases, however, the literature also calls for the allocation in the case of unlimited taxable organ carriers to be made according to the criteria for necessary and arbitrary business assets.

The assignment according to the principles to the intended operating assets is made on the basis of the overall business initiation context. However, it then only sets minimum requirements for the allocation of the asset to the operation of the taxable person. It therefore takes less account of the asset’s operational significance. A classification according to these criteria should therefore only succeed in the rarest cases.

Then should rather be assigned according to the criteria for necessary operating assets. Therefore, a significant shareholding is part of the necessary business assets if it decisively promotes the taxable person’s commercial activity. The same applies if it serves to ensure the sales of products of the taxable person. Finally, the participation is also part of the necessary operating assets if it serves to enforce the uniform will to act in the operating company in the context of an operating task.

3.2.5. Allocation of participation to the foreign permanent establishment

The risk of attributing the organ participation to a foreign permanent establishment of the organ carrier with unlimited taxation exists if a foreign permanent establishment of the organ carrier has close supply and service relationships with the organ company. Then it is possible that the necessary national reference of the institution is not available. In this respect, the assignment to the foreign permanent establishment state is possible on the basis of economic reasons or in accordance with §§ 1 (5) AStG, 7 BsGaV. If DBA is to be applied for the foreign permanent establishments of the organ carrier, the allocation of the organ participation must be made in accordance with this DBA.

3.3. Limited taxable organ carrier with domestic establishment

3.3.1. Differentiation is needed

For the assessment of whether the organ participation is attributable under national law to the national establishment of a limited taxable organ carrier, a distinction must be made between three cases. A distinction must be made between whether the institution is a partnership, a branch or an independent permanent establishment.

In the first variant, the partnership concludes the profit transfer agreement as a civil contracting party. However, the limited-tax co-entrepreneurs who form the partnership do not conclude the profit transfer agreement. In variants 2 and 3, the contracting party is therefore a limited taxpayer. The profits should then be transferred to the foreign organ carrier.

3.3.2. partnership as organ carrier

3.3.2.1. Domestic management establishment is always available

If a partnership is an organ carrier, the question arises as to whether the partnership has a permanent establishment in Germany at all, to which the participation can then be attributed in the second step.

In accordance with § 106 paragraph 2 no. 2 HGB, commercial partnerships have to register, among other things, the place of their registered office and the domestic business address for entry in the commercial register. Here, the principal place of business or the registered office of the partnership is always at the place of de facto management. The reason for the introduction of the notification obligation was the creation of a service facilitation for creditors. However, this facilitation of delivery is not achieved if the registered office of the commercial company and its business address are disconnected.

As a result, however, it is also then that the domestic partner company always requires a domestic management. Consequently, the original commercial partner company always maintains at least one domestic management establishment at the place of management.

3.3.2.2. Allocation of participation to this permanent establishment

In the second step, however, the participation must then also be actually attributable to the domestic establishment in order to meet the requirements for the national reference of the organization. If, in accordance with the above-mentioned criteria, the participation is included in the partnership’s total assets, this at least justifies its tax liability in accordance with the principles of arbitrary business assets. However, this allocation does not automatically apply for the purposes of an allocation of operating capital. Rather, an assignment to the foreign permanent establishment is also conceivable.

The assignment to the foreign permanent establishment can be made on the basis of a DBA-specific allocation of participation. In the non-DTA case, in accordance with the principle of initiation, in comparison between the domestic permanent establishment and the foreign permanent establishment of the partnership, there may primarily be an interconnection with the foreign permanent establishment.

On the other hand, there should be no problem of attribution if the sponsor partnership has only domestic permanent establishments and the shareholders resident in non-DTA foreign countries do not pursue any further business activities. Then, in the absence of competing permanent establishments, the participation of the organs must in any case be attributed to a national permanent establishment of the partnership in accordance with the general principles for arbitrary operating assets.

3.3.3. Branch as organ carrier

The branch registered in the commercial register always establishes a permanent establishment in accordance with § 12 sentence 2 number 2 AO. The allocation of the organ participation to the domestic establishment according to functional aspects is in principle conceivable. In practice, however, it has been difficult to refute the above-mentioned central function thesis of the financial administration.

The instrument of the managing holding establishment often attempts to justify a domestic arrest of holdings in corporations. The reason for this is that according to controversial BFH jurisprudence, a limited company can exercise management functions in several places. It is therefore legally possible and economically feasible for a capital company actually based abroad to direct its business in Germany via a domestic management office. This can in principle be assigned an organ participation. In purely practical terms, however, it cannot normally be ruled out that the organ participation also serves a foreign permanent establishment of the limited taxpayer. There is an economic connection between the participation and the foreign parent company simply because of the holding of company rights. Therefore, the refutation of the presumption is therefore regularly very problematic. As a rule, there is a lack of the necessary national reference of the institution.

3.3.4. Domestic establishment as organ carrier

In the case of a limited taxpayer who operates a domestic permanent establishment, a clear allocation of the participation only to the foreign parent company or only to the domestic permanent establishment is subject to great uncertainties, in particular over a period of several years. A proportional allocation to the parent company as well as to the permanent establishment is not possible in the overriding view and is not provided for in § 7 BsGaV. In this case, it is obvious to focus on the predominant economic reference of organ participation in the context of an actual functional approach.

4. Uninterrupted allocation

Another requirement for the national reference of the organs is that the organ participation or the participation in the intermediary company is continuously attributable to a domestic permanent establishment of the organ carrier throughout the duration of the organs. The entire duration of the institution shall include the period during which the institution takes effect.

The starting date is therefore the marketing year in which the institution takes effect for the first time. This occurs in the calendar year in which the profit transfer agreement takes effect. The institution shall have a retroactive effect on the first balance sheet date of the organ company's previous marketing year at the time of financial integration. Already at that time, the participation in the organ company or in the intermediary company must be attributable to the national establishment of the organ carrier. National detention must be maintained until the termination of the institution. In the case of partnerships as organ carriers, the civil ownership of the organ participation indicates a permanent assignment.

The temporal characteristic does not, however, require that the same participation in the organ company must be attributable to the same domestic premises of the organ carrier during the entire period of the organ membership. The change of allocation to another domestic establishment is harmless.

In addition, the change from an immediate to an indirect organ and vice versa is possible. What is decisive is the date from which the participation in the organ company or in the intermediary company becomes significant for financial integration within the meaning of § 14 (1) sentence 1 no. 1 sentence 4, 7 KStG. From that date onwards, the corresponding participation must actually be allocated to a national premises of the organ carrier.