• Service: Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 9/4/2013

Germany - Decree on attribution of profits to permanent establishments 

September 4: Germany’s Federal Ministry of Finance in August 2013 issued a draft decree concerning application of the arm’s length principle to permanent establishments, effectively implementing the “authorized OECD approach” into German tax law.

The draft decree (known in English as “Decree on the Attribution of Profits to Permanent Establishments”) has not been finalized and is not yet effective. It will be effective once is has been approved by the upper house (Bundesrat) and is published in the German federal law gazette, which is expected before the end of 2013.

German federal lands and trade associations have until 11 October 2013 to submit their written comments concerning the draft decree.


Earlier this summer, Germany enacted legislation (known in English as the “Administrative Assistance Implementing Act”) that incorporated the authorized OECD approach (AOA) into in Germany’s foreign transactions tax law.

Under the AOA, the arm’s length principle must be applied to the cross-border profit allocation between a permanent establishment and the enterprise of which it is a part. To this end, the permanent establishment must be treated as a separate and independent company.

Read TaxNewsFlash-Transfer Pricing: Germany - Cross-border profit allocation rules enacted

Draft decree

The Finance Ministry on 13 August 2013 issued the draft decree effectively transposing the AOA into German law.

According to the Finance Ministry’s position, the decree’s provisions are intended for taxpayer enterprises and the tax authorities to find profit attribution solutions that are acceptable at the international level, since based on the internationally accepted principles of profit attribution applicable to permanent establishments.

German enterprises maintaining a foreign permanent establishment and foreign businesses with a permanent establishment in Germany are subject to the decree.

The decree addresses:

  • The preparation of an auxiliary or ancillary account for the permanent establishment. This account is to contain all components that are to be attributed to the permanent establishment on the basis of its personnel functions, including assets, “free capital,” and liabilities as well as the related business revenue and expenses (including deemed business revenue and expenses based on the dealings).
  • Provisions to substantiate the allocation of assets, opportunities and risks, “free capital,” and liabilities to the permanent establishment. In principal, the allocation is conducted in accordance with the personnel function.
  • Determination of deemed contractual relationships (“dealings”) maintained by the permanent establishment with the rest of the enterprise of which it is a part.
  • Industry-specific regulations, in particular for banks, insurances, building and construction companies as well as for exploration companies.

Effective date

In principle, the decree is effective for fiscal years beginning after 31 December 2012.

Temporary regulations for permanent establishments of building, construction, and exploration companies have been issued.

Contact a tax professional with KPMG's Global Transfer Pricing Services.

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