Is there a threat of trade tax liability in the case of real estate leasing by foreign real estate corporations?
It is common practice to structure investments of a foreign company in German real estate in such a way that no trade tax is due on the rental income. The main focus here is to avoid a domestic permanent establishment of the foreign investor, which is required for the trade tax liability and which, according to unanimous opinion, is not established by the pure rental activity in Germany. However, a decision by the Berlin-Brandenburg Regional Tax Court makes one prick up one's ears, as the court regards a domestic office of a German subcontractor (asset manager) as a domestic permanent establishment and thus as giving rise to trade tax for the foreign rental company. It is to be hoped that the BFH will correct this decision.
Facts
The facts underlying the above-mentioned decision of the FG Berlin-Brandenburg (dated 21.11.2019 - 9 K 11108/17) correspond to a frequently encountered constellation: A GmbH (limited liability company) resident abroad for tax purposes - in this case, however, a German GmbH (with its registered office in Germany but its management located in Luxembourg and without its own domestic permanent establishment) rented out a domestic residential and commercial property belonging to it. The foreign real estate company concluded an asset management agreement with a limited liability company that was not affiliated with it under company law. At the same time, it granted the latter a comprehensive "property management power of attorney", according to which this asset management GmbH was authorized to conclude all legal transactions relating to the German real estate in the name of the foreign rental GmbH and to comprehensively represent the latter with regard to all rights and obligations, in particular with regard to the rental relationships and any repair orders.
The foreign Vermietungs GmbH and its foreign managing director had no power of disposal over the domestic premises of Asset Management GmbH. The latter only had - as the Tax Court then also pointed out - loan receivables from other German Objekt GmbHs with domestic real estate. In the case of these, the foreign managing director of the foreign leasing GmbH also acted as managing director.
Question
In dispute - with regard to the trade tax liability of the foreign Vermietungs GmbH - was the existence of a domestic permanent establishment of the foreign Vermietungs GmbH, specifically with regard to the premises of the commissioned Asset Management GmbH.
Decision of the FG
The Tax Court first refers to the general definition, according to which a permanent establishment is a fixed place of business or plant that serves the activities of the enterprise, is of a certain duration and over which the entrepreneur has a power of disposal that is not merely temporary. It follows from this that, in general, a rented domestic property does not constitute an (automatic) permanent establishment of the foreign lessor.
However, the court then refers to a decision of the BFH of August 24, 2011 (I R 46/10), which was based on a special situation regarding an English private equity fund company. In that case, a permanent establishment of the fund company in the premises of an appointed management company was assumed because (i) the former did not have any business premises of its own and because (ii) there was a personal union between the management of the fund company and the management company. The required "not merely temporary power of disposal" over premises of a domestic subcontractor was already given, the judges held, if the foreign entrepreneur had the ability to carry out its own business activities in the form of monitoring measures in the subcontractor's premises. This was deemed to be the case in the BFH case specifically due to the personal union present there.
In another BFH decision from 2011 (ruling of 23.02.2011 - I R 52/10), a permanent establishment of the entrepreneur was also assumed in the premises of his subcontractor because the entrepreneur actually used these premises without being granted a contractual right of use - which is not important according to the BFH. In addition, the BFH emphasizes once again that a continuous supervision of the subcontractor's activities by the main contractor can also establish a permanent establishment of the main contractor on the latter's premises.
Although the circumstances relevant for the decision in the above-mentioned BFH rulings differed from those in the present case, the tax court affirmed the existence of a domestic permanent establishment. As a decisive reason, it stated that there was a "close economic link" between the foreign rental company and, among others, Asset Management GmbH, referring to the fact - although irrelevant in itself - that the managing director of Asset Management GmbH had taken care of the comprehensive (including tax) interests of the foreign rental company. In addition, the fact that Asset Management GmbH had granted loans both to the foreign Vermietungs GmbH and to the other German Objekt GmbHs, in which the same foreign managing director of Vermietungs GmbH was active, had made a significant contribution to this relevant "economic linkage".
Finally, with regard to the criterion of "continuous monitoring", the Fiscal Court stated that, due to the "business relations of several years" between the two companies, there was a possibility of monitoring by means of telephone or written communication, which ultimately justified the assumption of a permanent establishment with regard to this criterion introduced by the Fiscal Court.
Conclusion and outlook
Since neither case law nor the literature has yet conclusively clarified which criteria apply to the assumption of a domestic permanent establishment in the classic constellation of the leasing of a German property by a foreign real estate investor with the involvement of a German asset manager, the BFH's decision in the present case is eagerly awaited. In this respect, one can only hope that the special situations underlying the two above-mentioned BFH decisions will not be generally applied to the typical case of a rental by a foreign entrepreneur and his involvement of a domestic asset manager. Otherwise, there would be a considerable trade tax risk for all real estate investments structured from abroad.