The draft version of a new Regulation on the attribution of profits to permanent establishments (PE Regulation) has been issued on 5 August 2013 by the German Ministry of Finance for public discussion.

The main goal of the PE Regulation is to provide details on the application of the Authorized OECD Approach (AOA) that was recently implemented in the German tax law.

In the draft regulation the main issues covered are as follows:

• Assets attribution and risks to a permanent establishment.
• Provision of the (free) capital/surplus to the different parts of the enterprise.
• Clarification of the conditions under which a different parts of a legal entity is recognized for tax purposes and in particular with respect to treasury dealings.

The permanent establishment Regulation also contains of specific provisions with respect to PE of insurance companies, banks, exploration sites and construction.

For the determination of the profit attributable to the permanent establishment as required by the German tax law the draft PE Regulation provides details on the dual-step approach following the guidance as provided by the OECD Report on the Profit Attribution to Permanent Establishments dated 22 July 2010. In the first step, the functions performed, assets used and risks assumed are attributed to the permanent establishment on the basis of the significant people functions. In the second step all intercompany transactions, including dealings between the different parts of the enterprise, are remunerated on an arm’s length basis.

The taxpayer has to prepare an “Auxiliary Calculation” on an annual basis with respect to the assets, the capital, the remaining liabilities and the revenues and expenses attributable to the permanent establishment, including deemed revenues and expenses resulting from internal dealings, for all financial years beginning after 31 December 2012.

If the taxpayer deviates from the basic principles for asset attribution laid down in the regulation, it should be properly documented that such deviation leads to a result that better reflects the arm’s length principle.

The Auxiliary Calculation has to be prepared at the latest by that time that the tax return for the respective financial year is filed.

The German Ministry of Finance has invited public comments on the draft PE Regulation by 11 October 2013 and it is expected that the PE Regulation will be adopted by the Upper House of Parliament (Bundesrat) at the end of 2013 or beginning of 2014 with retroactive effect as of 1 January 2013.