German draft permanent establishment regulations: Significant impact for insurers

Tax Controversy & Dispute Resolution ()

For financial years commencing on or after 1 January 2013, the German Ministry of Finance has amended Article 1 of its Foreign Tax Act to introduce the Authorized OECD Approach (AOA) for attributing profits to permanent establishments (PEs). On 5 August 2013, the German Ministry of Finance released for public comment draft Regulations (PE Regulations) on how the AOA will apply in practice. Once passed, the PE Regulations will be retroactively effective from 1 January 2013. They describe – among other things – how German and foreign insurance companies will be required to determine and document the profit that is allocable to foreign PEs of German insurers or German PEs of foreign insurers.

Some of the rules in the PE Regulations codify concepts and principles from Part IV of the 2010 OECD Report on the Attribution of Profits to Permanent Establishments (PE Report) into German law. However, other rules significantly deviate from international consensus and raise concerns about their acceptability to Germany’s tax treaty partners in cases of double taxation. Such deviation is likely to have a material impact on those multinational insurers with PE profit attribution systems that follow Part IV of the PE Report.

Finally, the PE Regulations will impose a significant compliance obligation on insurance companies, requiring certain auxiliary and shadow calculations to be prepared on an annual basis for profits, assets, liabilities and equity attributable to PEs.