The representative establishment in international tax law
If an entrepreneur wants to become active in another country without immediately tying up a large amount of business capacity, the legal form of the representative business establishment is often a suitable means.
The appointment of such a representative will often be made at the stage when the market is being developed when it should first be examined whether it makes sense to become active in this country in the long term.
This article deals in detail with the problem of the cases in which a (permanent) representative establishes a permanent establishment in a particular country.
1. concept of representation and the problem of permanent establishments
Art. 5 para. 5 and 6 of the DBA-MA and § 13 AO deal with the person of the (permanent) representative. According to Article 5, para. 5 DBA-MA, the activity of a representative dependent on the company's agreement law establishes a permanent establishment: This is a person who is responsible for the long-term business of another company and is subject to the instructions of the latter (BFH 18.12.90, BStBlII 91, 395).
In addition, the dependent representative must work for the company with a certain degree of permanence in the other contracting state, usually exercising an existing power of attorney there and concluding contracts in the name of the company.
An exception to this principle applies only if the activity of the representative is limited to auxiliary and secondary activities which do not constitute a permanent establishment under Article 5, para. 4 DBA-MA.
The mere activity of such a representative leads to the assumption of a notional permanent establishment, where a spatial reference point in the sense of a fixed place of business - as is required for a "normal" permanent establishment under Article 5, para. 1, 2 DBA-MA - is no longer necessary (BFH 30.4.75, BStBl II, 626).
Accordingly, Article 5, para. 5 DBA-MA is a substitute for a fixed place of business, which may have considerable effects in the various DBAs (cf. Art. 10 para. 4, Art. 11 para. 4 and Art. 12 para. 3 DBA-MA, the so-called permanent establishment reservation, which only applies to permanent establishments which are actually located abroad; cf. no. 31OECD Model Comment on Art. 10 DBA-MA).
Since the representative place of business within the meaning of Article 5, para. 5 DBA-MA only constitutes a substitute fact (fictitious place of business), the general feature of the fixed place of business takes precedence over Article 5, para. 1, 2 DBA-MA. This means that if there is a fixed place of business over which the company has the power of disposal, an activity of a dependent representative carried out in this place of business is, in any case, to be regarded as an activity which leads to the acceptance of a permanent establishment within the meaning of Article 5, para. 1, 2 DBAMA - i.e. not a fictitious permanent establishment - unless it is merely an auxiliary activity or an activity of a preparatory nature under Article 5, para. 4 DBA-MA. In this case, the dependence of the representative or the existence of a concluding power of attorney in the person of the representative is no longer relevant.
In this connection, it should be noted that the home of the dependent representative cannot normally be regarded as a fixed place of business of the enterprise under Article 5, para. 1 DBA-MA, because the enterprise does not have the necessary, not only temporary, power of disposal over the premises required for a fixed place of business, and this does not change if the entrepreneur is allowed to enter the home of the dependent representative or if the telephone connection in the representative's home is in the name and on account of the represented enterprise.
Only a third person can be considered as a representative, who can fulfil the substitute function of a permanent establishment through his activity. I.e. the entrepreneur himself or an organ of a corporation (managing director, board of directors) cannot simultaneously be an entrepreneur and a representative within the meaning of Art. 5 DBA-MA, because the concept of a representative presupposes that the person represented carries out actions in place of the entrepreneur which fall within the latter's business (BFH 18.12.90, loc.cit.).
2. dependent and independent representative
The activity of a representative leads to the acceptance of a permanent establishment if the representative
- has a power of attorney to conclude contracts on behalf of the company,
- usually exercises this power in the other state, and
- is not an independent representative pursuant to Art. 5 Par. 6 MDBA, or
- he is an independent representative, but acts for the company outside of his ordinary business activities.
The term "dependent representative" is not defined in the DBA-MA. Rather, a dependent representative exists if there is no independent representative within the meaning of Art. 5 para. 6 DBA-MA (see also No. 32OECD Model Comment on Art. 5).
The activity of a representative leads to the assumption of a notional permanent establishment only if it is exercised on a sustained basis and thus shows a certain continuity. This is made clear by the requirement that the power of attorney must be exercised normally. Only if the representative exercises the power of attorney in the other country "repeatedly and not only occasionally" and thus continuously over a longer period of time (No. 32 OECD Model Comment on Art. 5), he establishes a permanent establishment for the company there.
However, this does not mean that the representative must be resident or domiciled in the other Contracting State or be subject to unlimited tax liability there. Nor does it mean that the representative must always be the same person. The representation can be made by several representatives in succession in order to be considered as lasting. According to the literature, in order to be considered sustainable, the representative must at least be active in the other state to such an extent that he fulfils the requirements of habitual residence (§ 9AO).
3. the meaning of the power of attorney
The required power of attorney must be aimed at binding the company and therefore concern contracts for activities that constitute the company's actual business activity (sale of goods and merchandise or services); the conclusion of employment contracts and other contracts relating only to internal business operations is not sufficient for the acceptance of a power of attorney (No. 33 OECD Model Comment on Art. 5).
Furthermore, even if a power of attorney to conclude contracts exists, a permanent establishment need not be assumed if the representative's activity is limited to auxiliary or preparatory activities within the meaning of Article 5, para. 4 DBA-MA.
The power of attorney must be exercised on behalf of the company in order to qualify as a concluding power of attorney within the meaning of the regulation. This means that by exercising the power of attorney on behalf of the company, the company must be directly bound to the contracting party. It must therefore be a direct power of attorney. A merely indirect power of attorney is not sufficient.
A merely indirect power of attorney exists, for example, if the representative concludes contracts in his own name but for the account of a third party (e.g. commission agent). In such cases, the question of whether the representative is dependent or independent is irrelevant. Even a so-called power of attorney, which only entitles the agent to act as an intermediary in the name and on behalf of the represented company while the contract is concluded by the company itself, is not sufficient.
If the representative is authorized to negotiate all details of the contract bindingly for the enterprise, it can be assumed that the power of attorney is exercised, even if the signature is made by the entrepreneur in his country of residence (No. 33 OECD Model Comment on Article 5). The power of attorney does not need to be granted in a specific form; a mere power of attorney of acquiescence is sufficient.
4. the dependence of the representative
In accordance with Article 5, para. 5 DBA-MA, no fictitious permanent establishment for the represented enterprise within the meaning of Article 5, para. 5 DBA-MA is established if it is an independent representative acting in the ordinary course of business.
The characteristic of the independence is to be understood in the legal and economic sense (No. 37, 38 OECD sample comment to art. 5), which the BFH calls "personal liberty" (BFH 30.4.75 loc. cit.;23.9.83 BStBl II 84, 94; 14.9.94 BStBl II 95, 238). This is to be distinguished from objective independence in the sense of independence from instructions of the principal. The fact that a representative is bound by instructions within the scope of a business relationship does not in itself lead to dependence on the representative.
Any broker, commission agent or representative with whom the company maintains business relations abroad is factually dependent. If the focus were therefore to be on the factual obligation to follow instructions, the provision of Art. 5 para. 6 DBA-MA would lose its meaning (BFH 30.4.75, loc.cit.). There is therefore no dependency in the sense of the agreement if the entrepreneur makes specifications regarding prices, delivery conditions, warranty etc.
Whether a representative is dependent or independent, can be determined after the material or after the personal independence or after both (BFH 30.4.75, loc.cit.).
5. acting in the ordinary course of business
Exceptionally, the agency activity may then lead to a permanent establishment for the company, if the independent agent acts outside the scope of his regular business activities like a dependent agent within the meaning of Art. 5 para. 5 (No. 38OECD Model Comment on Art. 5). In the opinion of the Federal Court of Finance, this must be decided on the basis of whether the activity of a representative is a normal commercial activity (Federal Court of Finance 14.9.94, loc.cit.). Here it depends on the usual business area of a commercial agent after the traffic view within the respective abstract career profile (BFH 23.9.83, BStBl II 84, 94).
The BFH justifies its view with the considerations that when referring to the own past activity of the enterprise the first time admission of an agency activity would lie always outside of the usual business range, while the assumption of a second agency would lie again in the context of the usual own business activity. Therefore it is regarded as compelling to understand the tidy business activity after the typical career profile which can be found in the respective industry.
As an independent representative, who acts within the scope of his ordinary business activity, an insurance representative is to be regarded in principle also, independently of whether he collects premiums or is switched on into the damage adjustment (BFH 30.4.75, loc.cit.).
6. relationship of the terms "representative" according to AO and DBA-MA
If the "permanent representative" in accordance with § 13 AO is still congruent with the representative who "usually" exercises the power of attorney to conclude contracts, the concept of representative in Article 5, para. 5 DBA-MA is narrower than that of § 13 AO since it also requires the existence of a power of attorney and the dependence of the representative.
However, it must be noted that the tax authorities apply the narrower concept of Art.5, para. 5 DBA-MA even without the existence of a DBA for the area of limited tax liability under § 49 EStG (R 222Abs. 1 EStR).