Our experts explore what the national tax court's decision on permanent establishment means for international real estate investors
The German Federal Tax Court (FTC) has clarified that appointing a domestic service provider, such as a managing or property agent, generally does not constitute a permanent establishment for non-resident landlords. In this article, we consider the ramifications for international real estate investors.
The mere ownership of German property generally does not constitute a permanent establishment (PE) of a non-resident landlord in Germany. This is important for many international real estate investors as it means their German rental income and capital gains derived from local real estate is generally only subject to German corporate income tax (15.825%). By contrast, no German trade tax is charged because maintaining a PE in Germany is a prerequisite for trade tax becoming chargeable.
Against this background, German tax authorities have often tried to broaden the definition of a PE arguing that appointing a domestic managing agent can already qualify as a PE for non-resident landlords. The recent decision of the German Federal Tax Court (FTC), III R 35/20 has now confirmed that appointing a domestic service provider will only in exceptional cases constitute a PE for a non-resident landlord.
Key takeaways from the FTC decision
- Appointing a domestic service provider could qualify as a German PE of the non-resident landlord if the landlord has a contractual or de-facto authorisation to use the offices of the managing agent for the landlord's own business or personnel to operate from such premises.
- Absent of such authorisation, appointing a domestic services provider could qualify as a German PE if the non-resident landlord is in a position to supervise the activities of the managing agent on the premises of the service provider on a permanent basis.
- Such a supervisory position may be deemed to exist for instance if the same personnel act as members of the management bodies for both the non-resident landlord and the domestic property agent.
- By contrast, merely assigning tasks to a domestic service provider, even comprehensive ones, should not constitute a German PE. This means independent activities of a domestic agent at a certain location in Germany should generally not constitute a PE for the non-resident landlord at that location.
- If a landlord supervises the activities of a domestic property agent from abroad, this should also be insufficient to constitute a German PE.
The decision of the German FTC shows once more the risk of constituting a PE in Germany is challenging but generally manageable for non-resident landlords. It is, however, key that the landlord carefully documents and monitors the contractual and de-facto arrangements in place. Additionally, the non-resident landlord should have sufficient substance abroad so that no doubts regarding management functions can be brought forward.