In international tax law, the term permanent establishment is often used to represent connecting points of a tax alien in the country. This article explains what a permanent establishment is according to national understanding (§ 12 AO) and what differences arise from international tax law (e.g. DBA law).

The concept of permanent establishment is of a purely fiscal nature. It is not known either from commercial or company law.[120] The definition of permanent establishments differs in national tax law and in agreement law. Both national and international understanding of the establishment have in common that a company always has a parent company and can have a large number of establishments. If several institutions of a company in a (foreign) state form economic, technical and organizational units, individual operating sites are given in this state. Each permanent establishment is legally independent and together with the parent company forms the entire company. In the absence of legal personality of its own, contractual relationships cannot be concluded either between two permanent establishments or between the parent company and one permanent establishment. [121]

The national concept of permanent establishment is particularly important for the question of limited tax liability in Germany. In accordance with § 1 para 4 of the Act, § 49 para 1 no. 2 lit. a EStG are taxable persons without domicile and habitual residence or without domestic headquarters and place of management in Germany to the extent that they receive income from a domestic permanent establishment. This means that the Federal Republic of Germany can only access the assets and income of a foreigner if there is a domestic permanent establishment. [122]

2. premises under national law (§ 12 AO)

According to national understanding, a permanent establishment exists if there is a fixed business facility or plant serving the activity of an enterprise (§ 12 p. 1 AO). For the existence of a business establishment or plant, tangible objects or a combination of several tangible objects are sufficient[123], so that economic goods with a small floor area and no structural device can establish a permanent establishment.[124] In addition, this business facility or facility must have a firm relationship to a specific point on the Earth's surface.[125] The factual characteristic "fixed" does not have the significance of a mechanical connection between business facilities and the surface of the earth, but a local and temporal component.[126] This means that the bond to the surface of the earth is spatially constant as well as to a certain durability with a continuity, i.e. Regularity must be established.[127] In addition to the connection to the surface of the earth, the business owner must also have a certain power of control over the business establishment.[128] Otherwise, the business establishment cannot serve the company permanently.

In addition, the business establishment or facility must be related to the activity of the company. For this purpose, the business establishment or facility must be designed to directly promote the purpose of the business.[129] In principle, this criterion is very broad. However, the direct reference is not given, for example, at a domestic control and coordination body if it monitors exclusively foreign affiliated group companies and thus does not serve the domestic company directly.[130] Also, social facilities for the personnel of a company do not directly serve the purpose of the company and thus cannot be permanent establishments.[131] Also, economic goods do not directly serve the purpose of the company itself and thus cannot establish a permanent establishment if they are rented or leased. [132]

2.1. Positive catalogue of § 12 AO

In addition, § 12 S. 2 AO provides a positive catalogue. The business establishments mentioned therein are always regarded as permanent establishments, even if the conditions of the general concept of permanent establishment are not met. Accordingly, the BFH has decided for the place of management (No. 1) that this also constitutes a permanent establishment, if there is also a lack of a permanent business facility.[133] The fact that the other requirements are not necessary for the existence of a permanent establishment for the facilities referred to in No. 2 to No. 8 of § 12 S. 2 AO arises from § 12 S. 2 No. 8 AO, according to which a construction or assembly of a building is considered a permanent establishment independently of a fixed commercial establishment.[134]

2.2. Result of the establishment under national law

Overall, the national concept of establishment is broadly defined in § 12 S. 1 AO and is also generously interpreted by the BFH jurisprudence[135]. In addition, there is the positive catalogue of § 12 S. 2 AO with site fiction for eight facilities, without the other requirements having to be fulfilled. All this serves to establish domestic permanent establishments and thus to secure domestic taxation substrate within the framework of the limited tax liability.

If, under national law, there is a permanent establishment and thus a tax reference point of a taxpayer resident abroad, taxable income is created under national law in the country. If, on the other hand, the Federal Republic of Germany has concluded a DTA with the foreign state, a permanent establishment must also exist in the sense of agreement law. Otherwise, the DTA in the source state would negate the necessary local connecting point and thus would not entitle the source state to proportional taxation of the profit generated on its territory. [136]

For this purpose, the OECD-MA in Art. 5 shows its own definition of premises under agreement law. According to that provision, the concept of permanent establishment includes a fixed place of business through which the business activity of an undertaking is carried out in whole or in part. Due to the independent definition of premises in the OECD-MA, the interpretation can only be based on the interpretation results of § 12 AO to the extent that the wording of the individual terms used is identical in both provisions. [137] Consequently, the requirements for the “fixed operating facility” referred to in the OECD-MA are identical with § 12 S. 1 AO.[138] The power of disposal over the business facility required by both national and convention law is also identical.[139]

While § 12 S. 1 AO also presupposes that the business establishment must “serve” the company, a permanent establishment under agreement can only exist where the activity of the company is fully or partially “exercised”. Thus, the wording of both standards is different, so that the provisions of the agreement law are more narrowly defined. [140] Contrary to § 12 (1) AO, the mere existence and usefulness of the business establishment is not sufficient to establish a permanent establishment in accordance with Art. 5 OECD-MA. Rather, the establishment of the business of the company must actually be exercised in whole or in part. [141] This means that the required activity must be carried out in the business establishment. This can be done by people, but it does not have to. It is now recognized that the activity can also be done by automatically operating machines.[142]

Similar to § 12 S. 2 AO also contains art. 5 par. 2 OECD-MA a positive catalogue. However, § 12 S. 2 AO contains an extension of the term to § 12 S. 1 AO, while paragraph 2 of Art. 5 OECD-MA only specifies the basic facts of paragraph 1.[144] This becomes clear in the decision of the BFH[145], according to which the place of business of the management always constitutes a permanent establishment in accordance with § 12 S. 2 No. 1 AO even in the absence of a permanent business establishment. However, a permanent establishment within the meaning of OECD-MA constitutes the place of management only if it also meets the requirements of art. 5 par. 1 OECD-MA, thus constitutes a permanent business institution. [146]

The one referred to in Art. 5 para. The negative catalogue contained in paragraph 4 of the OECD-MA also has the same effect as paragraph 2 only declaratory and specifies the criteria referred to in paragraph 1. The enumeration of fixed business establishments which cannot justify the prerequisites of a permanent establishment as defined in paragraph 1 of this Article defines in paragraph 4 the “lower limit” of the concept of permanent establishment under international law. [147]