Requirements for the Creation of Permanent Establishment in Germany

By Rüdiger Urbahns, M. Int'l Tax., Certified Tax Adviser, Hamburg, Germany (not affiliated with Grant Thornton LLP)

Editor: Greg A. Fairbanks, J.D., LL.M.

The Bundesfinanzhof, Germany's federal tax court, ruled in a recent decision that use of business premises or a plant does not constitute a permanent establishment under §12 of the Abgabenordnung (general tax code), subject to taxation in Germany, when the foreign company does not have certain authority over the business premises or plant in which it operates (Bundesfinanzhof, June 4, 2008, IR 30/07, published September 10, 2008). The Bundesfinanzhof clarified, in distinction from previous rulings, that it is not sufficient for the creation of a permanent establishment if the foreign company just conducts its operations on the premises of a German enterprise, even if the activity continues for several years.


In 2004, the Bundesfinanzhof (July 14, 2004, IR 106/03) held that a U.S. enterprise created a permanent establishment in Germany when it used premises provided to it for conducting its business. In this case, a U.S. company provided training over several years to U.S. army personnel on using defense systems installed at a U.S. army base in Germany. The Bundesfinanzhof held that the U.S. enterprise had certain authority over the premises, which led to the conclusion that a de facto lease agreement was established in connection with the service agreement.


In contrast to the 2004 decision, the Bundesfinanzhof held in IR 30/07 that a Dutch enterprise cleaning aircraft on the premises of a NATO air base in Germany is not deemed to have created a permanent establishment in Germany. The Dutch company was a subcontractor for cleaning services and employed several workers who had access to the air base premises (including identification cards and keys to recreation rooms and working space with telephone and fax facilities).

In this case, the Bundesfinanzhof held that it is not sufficient to create a permanent establishment if a foreign enterprise is just conducting its business on the premises of a German enterprise when fulfilling its service obligations. To create a permanent establishment, it must also be a lessee or, without having a separate lease agreement in place, at least be in the position of a de facto lessee, which comes close to such a lease agreement. A de facto lessee would have possessory rights, such as nondeniable access to (certain) premises. This position can be summarized by saying that it is not sufficient for the creation of taxable nexus in Germany when a foreign enterprise is only treated as a visitor on the premises of a German company, even when the relationship is maintained over a long period and in connection with services.


Although there has been no decision on tax treaty provisions similar to Article 5 (Permanent Establishment) of the Organisation for Economic Co-operation and Development's Model Tax Convention (OECD MC), it seems that the Bundesfinanzhof decision may back Germany's rejection of the example in Article 5, ¶4.5, of the OECD Commentaries on the Model Tax Convention (July 2008). Article 5 defines "permanent establishment" as "a fixed place of business through which the business of an enterprise is wholly or partly carried out."

In the example from the commentary, for two years a painter spends three days a week in his client's office building. The painter's presence in the office building performing "the most important functions of his business (i.e. painting)" is sufficient to constitute a permanent establishment. Article 5, ¶4.6, of the OECD Commentaries adds, "The words ‘through which' must be given a wide meaning so as to apply to any situation where business activities are carried on at a particular location that is at the disposal of the enterprise for that purpose."

This Bundesfinanzhof decision provides an opportunity to avoid permanent establishment in Germany and thus avoid additional tax and compliance costs in certain cases. Practitioners should carefully review the terms of service agreements, especially where such agreements regulate access to the premises of a German company.



Greg A. Fairbanks, J.D., LL.M., is a tax manager with Grant Thornton LLP in Washington, DC.

For additional information about these items, contact Mr. Fairbanks at (202) 521-1503 or

Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.

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