In a decision dated 23 October 2018 (I R 54/16), but only published on 17 April 2019 the German Federal Fiscal Court (Bundesfinanzhof – “BFH”) held that the managing director of a foreign company can qualify as a German permanent representative within the meaning of sec. 13 of the German Tax Code and therefor constitute a taxable presence of the company in Germany.

In this case, a Luxembourg stock corporation (LuxCo) traded dental gold, i.e. it purchased – predominantly from dental laboratories in Germany – old dental gold and sold it to on to companies that sorted the gold. LuxCo maintained an office in Luxembourg where it kept its records and had a safe to store the dental gold. The managing director (and majority shareholder) of LuxCo managed its business from the office of LuxCo in Luxembourg. He had use of a Luxembourg apartment but he also had an apartment with his wife a couple of hundred meters away across the border in Germany.

The German tax authorities argued that, due to the substantial activities of LuxCo’s managing director in Germany, LuxCo had a German permanent representative, and therefore was subject to corporate income tax. Under German domestic tax law, a non-German entity is generally only subject to German corporate income tax if it maintains a permanent establishment or has appointed a permanent representative in Germany. 

Until this decision, it was widely held by scholars and in case law at the level of local tax courts that the management of a company cannot qualify as its permanent representative within the meaning of sec. 13 AO, because conceptually a representative has to be someone who can be distinguished from the represented person, and as a company only acts through its management, the management cannot – according to this theory - be both the represented person and the representative.

The BFH conceded that a single individual entrepreneur cannot simultaneously be the taxpayer who is engaged in a business and his own representative. However, the BFH does not apply this analysis to a company such as LuxCo and its management. According to the BFH, neither the wording of sec. 13 nor its spirit or purpose support the analysis that it does not cover the representation of a company by its management. To be a permanent representative in Germany, the managing director of LuxCo had to act substantially (and not just occasionally) on behalf of LuxCo in Germany – which he did.

Interestingly, LuxCo and its managing director were successful in showing that LuxCo’s place of effective management was in Luxembourg. The fact that LuxCo nevertheless became subject to German corporate income tax based on its manager qualifying as a permanent representative is a signal that there is no safe harbour for corporate representatives of foreign companies. The only comfort that remains is that for German trade tax (Gewerbesteuer) purposes a permanent establishment is required, i.e. a non-German company (place of management abroad) does not incur a trade tax liability just because it has a permanent representative in Germany.