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The concept of a permanent establishment or fixed establishment in VAT law

From a VAT perspective, determining whether or not and where a permanent establishment (fixed establishment) exists has a material influence on the question about the extent to which a service is VATable and, if applicable, not exempt from VAT. Taxpayers frequently fail to appreciate that a fixed establishment and a permanent establishment for profit tax purposes are not always identical. A recent Federal Fiscal Court (Bundesfinanzhof, BFH) ruling is a good reason to review whether or not permanent establishments for VAT purposes exist outside of Germany (EU territory or also third countries).

New BFH ruling on the concept of a permanent establishment

According to current BFH case law, a business shall be deemed to maintain a permanent establishment or fixed establishment, in any case, if the business has full access to a facility that has a sufficient degree of permanence and displays a structure that, in terms of human and technical resources, enables the respective service to be provided autonomously (BFH ruling from 29.4.2020, case reference: XI R 3/18).

The fixed establishment in VAT law

The (German) national concept of a permanent establishment must be interpreted, in conformity with the EU Directive, like the concept of the “fixed establishment”. The assumption of a fixed establishment does not require the taxpayer to have there at its disposal staff that are directly employed by the taxpayer or physical resources owned by the taxpayer. However, it is necessary for the taxpayer to have a comparable power of disposition over the human and physical resources.

Therefore, a permanent establishment can also exist if such resources are made available via service providers or the client. This would be the case if the taxpayer

  • has free access to the premises,
  • is able exert influence on procurement, or alternatively,
  • is authorised to issue instructions.

Moreover, the structure has to have a certain consistency.

Interim conclusion: Consequently, the appropriate structure and thus the legal consequences of a fixed establishment could already arise on the basis of a contract.

Implications for consolidated VAT groups

A tax group for VAT purposes exists if, within the actual overall circumstances, a legal entity is integrated financially, economically and organisationally into a company. The subordinated legal entity - subsidiary - has to be regarded as being dependent in relation to the superordinated - parent - company. From a VAT point of view, the parent company is the sole business entity.

The effects of a consolidated VAT group are limited to its constituent parts based in Germany. The criterion for determining whether a parent company or a subsidiary is based in Germany or a foreign country is the location of the main office of the management board. If the parent company is based in Germany then its business will include the parent company itself (including the German and foreign fixed establishments) and the German subsidiaries. Foreign subsidiaries as well as permanent establishments for VAT purposes of subsidiaries based abroad are not part of the parent company’s business (cf. Section 2.9(6) of the German ordinance on the application of VAT).

Please note: It follows from the above that correctly classifying an entity as a fixed establishment could also have far reaching consequences with respect to internal sales in group companies as well as with respect to the extent of the value added tax group to be declared.

Recommendation: Individual businesses as well as groups of companies should check to see whether or not foreign permanent establishments are present. This is because a potentially erroneous classification would entail VAT consequences both in Germany and abroad. Besides paying potentially no VAT or too much VAT, these could also include offences that are punishable with fines or consequences under criminal law for tax offences.

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