Profit Determination for International Permanent Establishments: Adoption of Legislative Regulations
In 2013 the German legislator enshrined the so-called Authorized OECD Approach (AOA) in German law via changes to Art. 1 Foreign Tax Act. This implies that purely internal dealings between headquarter and branch/permanent establishment trigger income or charges at the moment they occur, whether intented or not. However, the regulation left many questions unanswered. The Federal Ministry of Finance submitted a reworked draft to the Federal Assembly, that was approved on October 10. The legislative regulation is applicable for fiscal years starting from January 1, 2015.
There are two urgent recommendations for taxpayers with declared or undeclared permanent establishments.
1. Ensure Contemporaneous Permanent Establishment Bookkeeping
The regulations legally obligate the taxpayer to create ancillary financial statements for the permanent establishment. These should also include fictitious income and charges from so-called “dealings” with the head office. Transactions in fiscal years from January 1, 2015, therefore need to be identified and reflected in the statements. The recording of transactions for the permanent establishment should be urgently adjusted to meet the requirements of the new regulation.
2. Documentation of Allocation Decisions
Documenting the allocation decisions of the taxpayer regarding people functions, assets etc. does not lead to a rebuttable presumption of the correctness of such allocations to the permanent establishment (or to the HQ), or to the recognition of the covered dealings. The allocation rules in the regulations are meant to be clear guidance, but leave room for interpretation. In practice, the tax authorities will expect rather more factual and functional documentation for a permanent establishment than for a separate corporate entity (e.g. a partnership). Disputes between the tax authorities and taxpayers can be expected. Taxpayers should therefore carefully ensure that all allocation decisions are comprehensible and supported by evidence. Taxpayers should pay particular attention to intangible assets, employee secondments and internationally mobile personnel.
A more detailed discussion of the new regulations will follow.
Our Expertise Tax Law
For further information, please contact:
Dr. Stephan Schnorberger
E-Mail: Stephan.Schnorberger @bakermckenzie.com
Dr. Juliane Sassmann
E-Mail: Juliane.Sassmann @bakermckenzie.com
Dr. Dirk Langkau
E-Mail: Dirk.Langkau @bakermckenzie.com
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