Radical change in the Foreign Tax Act
2013 saw a radical change in the Foreign Tax Act, adopting the “authorised
OECD approach” of treating a permanent establishment as though it were a
separate legal entity for the purposes of determining its taxable income.
Thus, a German head office or permanent establishment is now expected to follow the
transfer pricing rules – including the documentation rules – in respect of all
routine or unusual transactions with its counterpart abroad. The permanent
establishment is to be defined by reference to the functions performed by its
staff, the assets they use, the risks and opportunities attaching to or derived
from their activities, and the provision of an adequate branch capital. The
finance ministry is authorised to issue ordinances with the approval of the
Bundesrat to govern these provisions on the allocation of branch income and
capital in detail.
A draft was published in 2013 but has not yet been finalised.
The Foreign Tax Act explicitly provides that a double tax treaty will only take
precedence over the new rules for determining branch income if the taxpayer
shows that the other state continues to apply the treaty as it stands and this
leads to actual double taxation.
EU Forecast
euf:ba18e:184/nws-01