Foreign real estate company with domestic real estate

A no-PE structure refers to a corporate structure that avoids a permanent establishment, usually in Germany. This is particularly important for foreign companies with domestic real estate. A foreign real estate company is subject to corporation tax and the solidarity surcharge, but not to trade tax.

In the case of foreign real estate companies with domestic real estate, the question regularly arises as to whether the involvement of a domestic management company establishes a permanent establishment (PE) in Germany – with the consequence that rental income is subject to trade and business tax. The following explanations apply if the foreign company is classified as a corporation.

Legal framework

According to current Federal Fiscal Court (BFH) case law (BFH v. 23.03.2022, III R 35/20; FG Berlin-Brandenburg v. 28.06.2023), a domestic permanent establishment is not established if:

• there is no identity of the management in the real estate company and the management company,
• there is no ongoing supervision of the management company by the foreign company in Germany,
• the day-to-day management of the real estate company is actually carried out from abroad.

Please note: A comprehensive power of attorney for the management company can be tax detrimental if it is not clearly documented that all essential decisions are made abroad (e.g., by email or in writing).

Guidelines for a secure no-PE structure

• Foreign management and documentation of all essential measures abroad.
• No office use or permanent presence of employees of the investment company in Germany.
• Management company only as a service provider, without decision-making powers in day-to-day business.
• Avoidance of comprehensive powers of attorney or clear restriction to operational activities.

Substance abroad (office, employees) is beneficial but not mandatory.

Taxation in Germany

The foreign real estate company is subject to corporate income tax and the solidarity surcharge (tax rate 15.825%) in Germany on its domestic rental income. In the opinion of the tax authorities, the company was therefore subject to “low taxation” under Sections 7 ff. AStG (less than 25%) until 2023. As a result, foreign income from the property was also subject to domestic taxation. The Federal Fiscal Court (BFH) (decision of September 13, 2023, I B 11/22) sees constitutional and EU law concerns, as the threshold exceeds the German minimum tax burden. However, the new 15% limit will apply from 2024 anyway.

Conclusion

Trade tax exemption through no-PE structures in Germany is still possible. The decisive factors are the clear division of tasks between the real estate and management company and proof that essential management decisions are made abroad.

Author: Peter Scheller, German  Tax Advisor, Master of International Taxation

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