Germany implements AOA for Permanent Establishments
After years of uncertainty and differing interpretations of the rules concerning the attribution of profits to permanent establishments the actual “Authorised OECD Approach (AOA)” was transposed into national law in Germany (§ 1 Abs. 5 EStG) by the Act Implementing the Mutual Assistance Directive and Amending Tax Regulations (Amtshilferichtlinien-Umsetzungsgesetz) effective 1 January 2013. The implementation is based on the final updated version of the OECD which was released on 22 July 2010.
The key characteristics of the AOA are:
- Functionally Separate Entity Approach
For tax purposes Permanent establishments (PE) are treated like having the same independence as corporations and partnerships. Head office and PE can enter into business relationships (“dealings”).
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The attribution of profits is done in two steps
a. Attribution of functions, risks, assets and capital to the PE
Starting point for the allocation process are “significant people functions”. Every function performed by the company is observed and all those functions which are performed by people working for the PE are allocated to the PE. Risks and assets associated with these functions are attributed to the PE as well (“risks/assets follow functions”). Based on the risks borne and the assets economically owned free capital is allocated to the PE.
b. Identification and pricing of every supply and performance relationship between head office and PE in accordance with the arm`s length principle.
The statutory order to the attribution of profits (“Betriebsstättengewinnaufteilungsverordnung” / BsGaV) entered into force on 18 October 2014 contains detailed information concerning the application of the arm`s length principle for PE. The regulation should specify the law and ensure an acceptable solution for taxpayers and tax authorities based on the internationally accepted principles.
In consequence, the implementation of the AOA results in the following changes:
- For the allocation of profits it is no longer sufficient to solely take the actually incurred expenses into account. Furthermore, the allocated functions, risks, assets and capital influence the profit.
- This may result in virtual profits. While the company as a whole has generated losses, the PE may show a profit.
The new Double Tax Treaty China-Germany signed on 28 March 2014 but not yet in force as well as the former one contains generally the arm`s length principle for the allocation of profits to PE. Nevertheless the wording of Art. 7 was not adapted to the new OECD guidelines. Thus it remains uncertain if and how the AOA will be operated in practice between Germany and China.
If you have any questions, please feel free to contact us.
Author: Benno Lange, Certified Public Accountant, Tax Advisor, office Gummersbach, +49 (0) 2261. 8195.0
AOA for Permanent Establishments (499.44Kb)
