Content
- New Court decisions on Permanent Establishments
- Tax audit: New sanctions for insufficient cooperation
- Over-indebtedness in the commercial balance-sheet- Consequences and possible remedies
- Transfer Pricing: The new transaction matrix
- Turbo Depreciation and New Benefits for Electric Company Cars
New Court decisions on Permanent Establishments
In two rulings, the German Federal Fiscal Court clarified the conditions that lead to a foreign permanent establishment in cross-border cases within the scope of an agreement for the avoidance of double taxation (DTA). As a rule, taxpayers generate income from such permanent establishments that is tax-exempt in Germany and subject only to foreign taxation. Vice versa, such rules are also applicable for foreign companies doing business in Germany.
- Permanent establishment of a taxi company under treaty law
A taxi operator living in Germany had access to the office space of a Swiss taxi dispatch center in Switzerland due to his membership in that organization. This space was equipped with three workstations and was available to a total of three taxi operators.
The taxi operator used the office space (including a lockable storage container) for management activities and for personnel administration of his employed taxi drivers, preparation of ongoing accounting, invoicing, financial control, and monitoring compliance with official requirements.
The Federal Finance Court confirmed to exempt the taxi operator’s income in Germany from tax under the progression clause, as the requirements for a permanent establishment under the treaty are met in Switzerland.
The decisive factor here is the “rootedness” of the company in the place where it conducts its business activities abroad. This rootedness is determined by an overall assessment of the interrelated characteristics of the temporal and geographical permanence of the business establishment and the company’s permanent power of disposal over this business establishment.
The personal storage container is an indication of permanent control over the business premises (in this case, the office space). Furthermore, the office space was not only used for auxiliary activities.
The main activity of a taxi company with several employed taxi drivers is not limited to driving taxis for the purpose of transporting passengers. Rather, it also includes the management and central entrepreneurial and administrative activities that the taxi operator carried out in the office space in Switzerland.
2. Temporal requirements for a permanent establishment under treaty law
Another case concerned the time requirements for a permanent establishment under treaty law. The Federal Fiscal Court has set a minimum period of six months for both the possession of business premises and the business activities carried out in those premises.
Please note | A company that has been in existence for less than six months does not justify an exception, even if the activities of that company were carried out entirely in the foreign business premises.
Recommendation:
If you plan any regular business activity abroad with a certain rootedness, it is vital to have checked by a tax expert if this creates a permanent establishment with effects on your tax obligations and situation.
Tax audit: New sanctions for insufficient cooperation
Some tax audits are completed within a short period of time. Others, however, can drag on for months or even years. Several legal changes have now been made to speed up the tax audit process. |
Qualified request for cooperation
Delays in a tax audit can sometimes be attributed to insufficient cooperation on the part of the taxpayer. According to the new Section 200a (1) of the German Fiscal Code (AO), the taxpayer must provide information, submit records, books, business documents, and other documents for inspection and examination, and provide the explanations necessary for understanding the records.
The (new) qualified request for cooperation is a discretionary decision by the auditor, which may be issued at the earliest six months after notification of the audit order. In this case, the taxpayer must act quickly. This is because the request for cooperation must be complied with within one month of notification. The deadline can only be extended in justified individual cases.
Penalty for delay in cooperation
The qualified request for cooperation becomes problematic for the taxpayer if it is not fulfilled or not sufficiently fulfilled within the deadline. In such cases, the newly introduced penalty for delay in cooperation is imposed. Exception: The delay in cooperation appears excusable, for example in the case of a severely debilitating illness.
The penalty for delay in cooperation amounts to EUR 75 for each full day of delay in cooperation (i.e., for each full day after the deadline set in the request for cooperation has expired). The days are counted up to the date on which the request for cooperation is fulfilled – at the latest until the date of the final meeting. This is because after the final meeting, there is no longer any need to ensure cooperation. However, a maximum of 150 days may be taken as a basis, so that the cooperation delay fee may not exceed EUR 11,250 (150 days × EUR 75).
Surcharge on the penalty for delay in cooperation
The penalty for delay in cooperation is not always the only penalty imposed. The auditor has the discretion to impose an additional surcharge on the penalty for delay in cooperation. The prerequisite for this is that
- a penalty for delay in cooperation has been imposed on the taxpayer in the last five years and there is reason to fear that the taxpayer will not fulfill his obligations to cooperate without a surcharge, or
- there is reason to fear that the taxpayer will not fulfill his obligations to cooperate without a surcharge due to his economic capacity. This can be assumed if the sales revenues in one of the years covered by the audit amount to at least EUR 12 million or if the consolidated sales revenues of groups amount to at least EUR 120 million.
If the auditor decides to impose a surcharge, the amount is also at his discretion. The surcharge may not exceed EUR 25,000 for each full day of delay in cooperation – also for a maximum of 150 days (thus a maximum of EUR 3.75 million).
Partial final assessment notice and entry into force
In order to speed up tax audits, the new partial final assessment notice was also introduced. This is because timely completion often fails due to a single issue that can only be clarified through intensive work. The problem is that this creates legal uncertainty regarding other issues that have been audited.
The new rules allow the auditor to submit a partial audit report before the audit is completed and then issue a partial final assessment. This allows individual findings that have been determined and can be delimited within the scope of an external audit to be established separately before the final audit report. If the taxpayer can demonstrate a significant interest in a partial final notice, this should be issued upon request.
Important note
The new provisions only apply to taxes and tax refunds arising after December 31, 2024. However, they also apply to taxes and tax refunds arising before January 1, 2025, if an audit order was announced for these taxes and tax refunds after December 31, 2024.
Over-indebtedness in the commercial balance-sheet-
Consequences and possible remedies
If loss-generating German subsidiaries of foreign groups are not provided with sufficient equity their equity in the commercial balance-sheet may become negative. What are the legal consequences of that?
- If a balance sheet shows that sustained losses incurred by the GmbH have resulted in at least half of the share capital being used up, the managing director must convene an extraordinary shareholders’ meeting in accordance with Section 49 (3) GmbHG.
- Reasons for insolvency include imminent insolvency, insolvency, and over-indebtedness. The latter two reasons for insolvency trigger the obligation to file for insolvency proceedings without undue delay, i.e., immediately, but no later than three weeks after the onset of insolvency and six weeks after the onset of over-indebtedness. If the managing director does not comply with this obligation immediately, he or she may be committing a criminal offense (delay in filing for insolvency) which may result in a personal liability or imprisonment.
- The managing director is responsible for preparing the annual financial statements. In the event of over-indebtedness in the commercial balance-sheet, he must check whether there is also over-indebtedness under insolvency law. If he is not capable of doing so himself, he must seek professional advice. If such an expert has been mandated and starts immediately to work on that, the managing director may wait with filing for insolvency until the expert presents his results.
- The managing director must also check whether the balance sheet can still be prepared on a going-concern basis or whether it must be prepared at liquidation values.
- A tax advisor or auditor commissioned to prepare the annual financial statements/financial accounting must inform the managing director if he or she discovers commercial insolvency and point out the risk of insolvency. He or she may only prepare the annual financial statements on a going-concern basis if it is plausible that there is no over-indebtedness in an insolvency status.
Companies affected with over-indebtedness in the commercial balance-sheet and no positive going-concern-forecast have the following possibilities to avoid filing for insolvency and prepare annual financial statements on a going-concern basis:
- Payments of the shareholder into the equity (capital reserves or nominal share capital), but not later than 3 months after the end of the financial year.
- A hard letter of comfort by the mother company, which proves to be able to cover all the liabilities of the German subsidiary with own funds.
- A step back in ranking declaration of the shareholder loans will only be sufficient, if the shareholder loans exceed the negative equity and if the company has sufficient liquidity for the next 12 months.
- In case the above is not possible a positive going concern forecast for the next 12 month from now onwards is necessary. This must include a liquidity forecast.
If none of the above is provided the tax advisor or auditor will not prepare annual financial statements in order to avoid liability issues.
Transfer Pricing: The new transaction matrix
In an attempt to simplify the transfer pricing rules for multinational companies the German tax authorities have decided that a local file must only be presented on special request by the tax authorities if the intragroup deliveries of the German entities with foreign related entities exceed 6 million Euros or the intragroup services exceed 600,000 Euros. The deadline for doing so is then 30 days after the request has been received. Despite the presenting deadlines it must be prepared within 6 months after the end of a financial year.
However, other documents must be presented automatically within 30 days after a general tax audit (not a special VAT, wage tax or social security audit) has been received or upon special request. Those documents are:
Records of extraordinary business transactions
- Business transactions are extraordinary if they go beyond the scope of normal day-to-day business in terms of their nature, content, purpose, scope, or risk, are therefore exceptional in nature, and are of significant importance for the amount of the taxpayer’s income in the year of the extraordinary business transaction or in the future. Examples are the conclusion and amendment of long-term contracts of particular importance, transfer of assets in the course of restructuring, transfer and assignment of economic goods and advantages in connection with significant changes in the company’s functions and risks, business transactions in connection with a change in business strategy that is significant for transfer pricing, conclusion of apportionment agreements.
A transaction matrix
- This is new since 2025. It can be seen as a local file “light” and shall give orientation for the tax auditor if and where in transfer pricing to go into details. It is prepared much faster than a local file and therefore a relief for the taxpayer. Since an audit order issued in 2025 or later regularly also covers audit periods prior to 2025, a transaction matrix must also be created for previous years in these cases.
- On 2nd. April 2025 the German Federal Ministry of Finance published an information sheet on how they want the transaction matrix to look like.
- The transaction matrix is a structured, tabular overview containing relevant information on the taxpayer’s cross-border business relationships with related parties and permanent establishments. In particular, it supports risk-oriented case and audit field selection in the context of external audits.
Components of a transaction matrix
- The transaction matrix must specify:
- a) the subject matter and type of business transactions (e.g., delivery of goods and ongoing circumstances),
b) the parties involved in the business transactions, identifying the recipient and provider of services,
c) the volume and remuneration (in euros) of the business transactions (e.g., loan volume and interest or remuneration for a delivery of goods or service),
d) the contractual basis (name of the contract document),
e) the transfer pricing method used (e.g., cost plus method or price comparison method),
f) the tax jurisdictions concerned, and
g) whether business transactions are not subject to standard taxation in the relevant tax jurisdiction. - It should be noted that existing contracts only need to be named and do not need to be attached to the transaction matrix. Business transactions are not subject to standard taxation, for example, if a preferential tax regime (e.g., Patent box) applies. Business transactions with a related party or permanent establishment in relation to a tax jurisdiction that are economically comparable in terms of functions and risks may be grouped together for the purpose of preparing records and must be entered accordingly in the transaction matrix (see Section 2 (3) GAufzV).
- If the transaction matrix is not submitted, a surcharge of €5,000 shall be imposed in accordance with Section 162 (4) sentence 1 of the German Fiscal Code (AO). The surcharge shall amount to at least 5 percent and at most 10 percent of the additional income resulting from an adjustment based on the application of paragraph 3, if this results in a surcharge of more than €5,000.
- In the event of late submission of usable records, the surcharge shall be up to EUR 1,000,000, but at least EUR 100 for each full day of delay;
A master file
- This is only applicable for companies with a turnover of 100 million Euros or more in the previous financial year.
Country-by-Country-Reporting
- This is only applicable for companies with a consolidated turnover of 750 million Euros or more in the previous financial year.
Recommendation:
Transfer pricing documents must be prepared on an ongoing basis and in time and the deadlines for submission are often too short to start working on the documentation after the request has been filed. Taxpayers should take this seriously, as severe penalties may be applied in case on non- or late compliance.
Turbo Depreciation and New Benefits for Electric Company Cars
Under the new Investment Immediate Action Program, businesses benefit from substantial tax incentives when purchasing fully electric vehicles:
- 75% depreciation in the year of purchase (effective from July 1, 2025).
- Increased price cap for the 0.25% private-use rule from €75,000 to €100,000.
- Applies to all vehicle categories – from passenger cars to vans and buses.
Example:
A company purchases a fully electric company car in August 2025 for €80,000.
- With the new turbo depreciation, €60,000 (75% of €80,000) can be deducted immediately in 2025.
- The remaining €20,000 is depreciated over the rest of the asset’s useful life.
Benefit: The large first-year depreciation significantly reduces the tax burden right away, while the private-use valuation remains favorably capped.