German Federal Tax Court PE Definition - BFH of 23 March 2022
On 23 March 2022, Germany's federal tax court (BFH) made a ruling published on 11 August 2022 regarding German third-party property management. The ruling stated that managing German real estate investments for a Luxembourg entity should not create a German permanent establishment (PE) for the Luxembourg tax resident.
Typically, foreign investments in German real estate are managed from abroad through foreign entities owning the real estate. Such rental income is generally subject to German corporate income tax without requiring a German PE. German PE is required for levying local trade tax on rental income, with rates ranging from 7-17%. Managing German real estate from outside the country does not create a German PE.
The BFH's case involved a Luxembourg investor who hired a German management company for its real estate investments. The management company also handled German properties for other entities of the Luxembourg investor. Employees and management bodies of the Luxembourg investor and the management company were different. Without a German PE, the Luxembourg investor filed a German corporate income tax return but not a trade tax return. German tax authorities argued that the management company's activities created a PE in Germany for the Luxembourg Investor, making it liable for both corporate income tax and trade tax. The BFH ruled that domestic third-party service providers do not generally create a German PE for foreign real estate investors.
The BFH ruled that only in exceptional cases, where foreign investors conduct activities at the service provider's premises or where management bodies are identical, a PE may be created. This ruling clarifies when a domestic third-party service provider may cause a foreign real estate investor to have a German PE. The decision aids in understanding the tax obligations of foreign real estate investors in Germany and the influence of third-party management on their tax liabilities.