Trade tax is levied on every permanent business that is operated in Germany, that is, for which a permanent establishment is maintained in Germany (§ 2 (1) GewStG – Gewerbesteuergesetz [German Trade Tax Act]). A permanent establishment is any fixed business facility or plant which serves the activities of an enterprise (§ 12 s. 1 AO – Abgabenordnung [German General Tax Code]) and over which it has a more than temporary power of control. Even if the activity of a corporation is always and in its entirety considered a business, it is only liable to trade tax to the extent that its trading profits are attributable to a permanent establishment operated in Germany. Part of the profits generated by the company must regularly be attributed to the permanent establishment of the management.
Pursuant to the established case law of the Federal Fiscal Court (Bundesfinanzhof, BFH), a domestic property that is merely rented or leased and is not used for business purposes for a certain period of time does not, in principle, constitute a domestic permanent establishment of the landlord or lessor. That is because the ownership or possession of real property is not deemed sufficient for the assumption of a direct “service” of the business facility or plant.
However, if a foreign-based (property) rental company commissions a domestic service provider to manage its property located in Germany, it may establish a domestic permanent establishment for itself. The prerequisite for this is that the company must be able to carry out its business activities by means of a corresponding material or personnel structure, i.e., in particular, that it must have permanent power of disposal over the property. Such entrepreneurial activity can be assumed, for example, if continuous and sustained monitoring is possible due to the fact that the management bodies are identical. In its ruling of March 23, 2022 (Case No. III R 35/20), the BFH took a position on the legal question of whether the foreign rental company can establish a domestic permanent establishment even if the domestic service company, which has comprehensive property management authority but is otherwise not further interconnected, performs purely asset management tasks.
In the case of dispute, a German Vermietungs-GmbH (limited liability rental company, hereafter “Rental GmbH”), whose sole managing director was domiciled in Luxembourg, owned a domestic property comprising a residential and a commercial building in the years from 2009 to 2013. The Rental GmbH granted a domestic Dienstleistungs-GmbH (limited liability service company, hereafter “Service GmbH”), which was not affiliated with it in the same way, a power of attorney to manage the property and thus transferred all rights and obligations in connection with the management of this property to this company. The power of attorney included, among other things, the conclusion and termination of rental and lease agreements as well as insurance, service and work contracts, and representation towards credit institutions, tax offices and other institutions. Since the managing director, who was resident in Luxembourg, managed the Rental GmbH from that location, the latter did not assume a domestic permanent establishment and thus no trade tax liability. The Tax Court Berlin-Brandenburg, on the other hand, assumed a domestic permanent establishment with the consequence of an actual trade tax liability. In the course of the appeal proceedings, the BFH overturned the first-instance ruling, but referred the matter back to the tax court for further clarification of the facts and a decision.
In the opinion of the BFH, the mere transfer of even comprehensive dispositive tasks to the Service GmbH is not sufficient to establish a domestic permanent establishment of the contracting Rental GmbH. Otherwise, a permanent establishment could be established with any subcontractor. However, the independent activity of a subcontractor at a certain location does not always constitute a permanent establishment of the main contractor at this location. Rather, such a permanent establishment is only deemed to exist if the main contractor carries out its own operational activities, such as actual, continuous on-site monitoring, and the activities attributable to it have a certain sustainability and go beyond selective and individual case-related measures. Monitoring from abroad, for example - as in the case of dispute - by means of written and telephone communication, or the mere possibility of monitoring are not sufficient.
Only in the case of a certain spatial and temporal “rooting” of the Rental GmbH with the place of conduct of the entrepreneurial activity in the domestic permanent establishment of the Service GmbH can the direct service of the business facility or plant for its own entrepreneurial purposes, which is required for the formation of a permanent establishment, be assumed. For the classification as a domestic permanent establishment of the main entrepreneur, a special activity must be added to the mere possession and ownership and its leasing, e.g., the care and maintenance of the leased object by own or commissioned personnel employed in the leased business facility, or monitoring measures are required in the premises of the Service GmbH, or it is assumed that the management bodies in both companies are identical.
The BFH was not able to assess the existence of own activities of the Rental GmbH sufficient for a permanent establishment due to the lack of sufficient factual findings by the tax court itself and therefore returned the proceedings to the latter. In doing so, it pointed out that in the absence of a domestic permanent establishment, a possible management permanent establishment of the principal entrepreneur must be examined in addition to the actual activities. In this respect, the tax court must examine in the case of dispute whether the actual management was transferred to the property management company and exercised by the managing director there or (exclusively) rested with the managing partner of the Rental GmbH (possibly at his residence in Luxembourg). In this respect, it is relevant where - taking into account the comprehensive property management power of attorney - the decisions of some significance pending in the day-to-day business of the plaintiff were actually made and who had the decision-making authority in these matters.
Notice
For practical purposes, this ruling confirms the importance of the specific circumstances of the individual case. Depending on the structure of the property management power of attorney, the activities carried out by the principal company and going beyond the rental, as well as the exercise of management, a domestic permanent establishment may well be assumed. Affected rental companies should review their contractual relationships and possibly adjust them accordingly.