In a recent decision (decision dated 21 November 2019 - 9 K 11108/17) the Fiscal Court of Berlin-Brandenburg – a lower German fiscal court - has affirmed the existence of a German permanent establishment of a non-German property company on the domestic premises of its German property manager, and thus a German trade tax (Gewerbesteuer) liability of the property company for its German sourced rent income and capital gains.
The Luxembourg property company engaged two German property managers and granted them wide powers of attorney with regard to its German property, among other things with the permission to conclude legal actions. According to the PoAs the German managers represented the property company vis-à-vis employees, tenants, authorities and third parties concerning the property under management. The property company itself did not have own premises but was managed by its sole managing director from his private place in Luxembourg.
The court affirmed the non-German property company subject to German trade tax for its German sourced income due to its affirmed German permanent establishment. Although the property company did not have own German premises the decisive factor was the close economic integration of the property company with its German property managers.
The court referred inter alia to the principles of a former ruling of the German Federal Fiscal Court (Bundesfinanzhof – “BFH”) (I R 46/10 of 24 August 2011) on the concept of a permanent establishment under the German-British Tax Treaty (in an outbound case). According to this ruling, a local permanent establishment may exist even if there is no contractually granted right of use over the premises of the local manager, but if the principal is able to pursue its business activities through the transfer of tasks and access to the material and personnel resources of the manager and
consequently has access to the premises of the manager and, if the principal has the possibility of continuous monitoring of the manager.
In the opinion of the court the before principles were met in the case at hand. This was supported by the fact that the property managers undertook comprehensive asset/ property management for the property company including the conducting of the German tax obligations of the property company and the close economic interdependence of the property company and its managers resulting from the mutual granting of loans. As a consequence the court classified the German property managers as harmful "management companies" within the meaning of the before BFH judgement and thus as a permanent establishment of the property company in Germany.
This judgement – although made by a lower German fiscal court which of course dealt with a rather untypical and unprofessional tax structure – lays out that the German fiscal authorities and tax courts are looking closer into non-German tax structures of investors holding German real estate. If a non-German property company would be subject to German trade tax not only the rent income but also capital gains from its German property would be subject to additional taxation in Germany. It is recommended to properly structure such property holdings including the engagement of German asset/ property managers. International real estate investors may therefore revisit in particular such engagements as well as their own non-German substance to avoid unintended German tax exposures.
As the court has allowed an appeal to the BFH we will report on the outcome of a respective decision.