Taxation of Permanent Establishments

Taxation of Permanent Establishments

When Does a Presence Trigger a Tax Liability?

A group of British contractors undertaking engineering work in Germany have found themselves under the spotlight of the German Tax Authorities. In a case that reached the German tax courts, the judges ruled that one of the engineers had a Permanent Establishment (“PE”) in Germany. Furthermore, the German tax authorities are arguing that all of the engineers have a PE accordingly.

In order to qualify as a PE, as referred to in the Anglo-German DTA , the worker[s] must;

1. have appropriate power to dispose of all premises,
2. consider it indispensable to the nature of their work,
3. apply to the “Rootedness” Concept (the notion that the establishment is fixed to the earth) and be used for business related purposes.

Double Taxation

The engineers are UK tax resident, therefore the PE decision has triggered a double taxation issue and – as we understand – a Mutual Agreement Process (“MAP”) to determine which country has taxing rights.

At the heart of the difficult position the engineers now find themselves in, is the Anglo-German Double Taxation Agreement (DTA). If foreign workers perform work using what the agreement defines as a PE, the country where the PE stands, holds taxation rights. Therefore, if HMRC agree that there is a PE in Germany via the MAP process, this is automatically the trump card. HMRC are not, however, compelled to automatically agree with the decision of the German courts.

The Permanent Establishment in Question

In this case, the German Fiscal Court deemed a that locker used for storage of personal items met the PE threshold. It is important to emphasise that the contractors did not own the locker, the lockers were not provided on a regular basis and there was no automatic right to their use. Regardless, the German tax courts ruled these lockers met the definition of a PE as outlined in the DTA.  As a result, and despite paying tax in the UK on their German earnings, the contractors are now being pursued for tax, interest and penalties by the German Tax authorities.

Unfortunately, any double taxation relief will have no impact on the significant interest and penalties being pursued by the German tax authorities.

WTT’s Take

The decision of the German Tax Courts has caused some furore. Individuals who were diligent in managing their tax affairs compliantly, now have huge German tax bills. Penalties being charged for what is a technical dispute, is particularly galling. HMRC have the power and ability to push back on the German tax authorities as part of the MAP process – a move which we fully support and hope will materialise.

Get in Touch

Got some questions regarding the taxation of permanent establishments? WTT’s tax investigation team has extensive expertise in international DTAs. Our team is well-placed to offer advice on foreign working arrangements within the contracting sector.

If you believe this case decision could affect you or should you have any contractor-related concerns, contact us today.