We don’t have any premises and we don’t need a subsidiary
Fail in foreign trade 10Ms. Diener runs a industrial-cleaning company at the German- Dutch border, and she has about 200 employees. In Germany, her important customers include Deutsche Bahn and large hotels. Her employees come from all over, mainly from Eastern Europe, but they always have valid German employment contracts and are naturally properly registered.
During a trade association event, Ms. Diener comes in contact with a Dutch businessman who owns a hotel in the Netherlands with more than 200 beds, and who is looking for a company to do the necessary cleaning work. Previously, the hotel had its own clea- ners and maids, but the personnel and social security costs have become so large that it seems very reasonable to outsource these activities.
After some negotiation, they come to an agreement, and Ms. Diener is asked to provide the cleaning crews for the hotel imme- diately. Ms. Diener assigns about 15 people to the Dutch hotel, and every day they drive about 30 km from Germany to their workplace in the neighbouring country.
Some time passes, and both business partners are quite satisfied with the deal they have made. Ms. Diener is earning good money in the Netherlands, and the hotel owner is very pleased. Everything is going perfectly. Everything? Well, yes, as long as you ignore the fact that Ms. Diener is providing services in a foreign country and acting as if there were no tax implications. In fact, it never even occurred to Ms. Diener that she could establish premises in the Netherlands for her work; so she conscientiously adds German value-added tax to the invoices for her company’s services and pays taxes on her ear- nings in Germany.
It’s possible that no one would have noticed this or complained about it, if the Dutch tax authorities hadn’t done an audit of the hotel and become aware of Ms. Diener’s company. The hotel’s purchase invoices for cleaning work were quickly separated out by the auditors, and the following calculations showed a revenue of about 1.6 million euros for the past 24 months.
The Dutch tax authorities, in contrast to Ms. Diener, very much assumed that the activities on Dutch soil constituted business pre- mises as per Art. 5 OECD-MA. They got out their calculators and determined a tax debt of 120,000 euros. On top of that, there were various fines and late fees, which increased the final tab to about 250,000 euros.
The subsequent letter from Amsterdam hit Ms. Diener like a stun grenade – particularly because the amount was payable in full within two weeks. And as if that wasn’t bad enough, Ms. Diener was also notified that the authorities in the Netherlands were investigating whether she was guilty of tax evasion.
Many companies conduct international business and are unaware that these legal transactions create a tax obligation. Art. 5 of the OECD Model Agreement establishes the circumstances that create business premises, and these regulations are growing stricter and stricter. The idea behind this does make sense: anyone who uses the tax-created infrastructure in a country to conduct business must also pay taxes on the earnings generated there.
Ms. Diener’s employees earned the revenue and the resulting profits on Dutch soil. The place of performance is clearly the Netherlands, with its infrastructure financed entirely by taxes, such as the streets that Ms. Diener’s employees use to drive to their workplace. In this instance it makes sense that the corporation tax is also owed here.
So how did things turn out for Ms. Diener? Naturally she went straight to her tax advisor and then to the responsible tax authorities in Germany. Over the past two years, Ms. Diener had declared all of the earnings from the Netherlands in Germany, and she had paid the necessary corporation tax and income tax as well. However, the German tax authorities were not convinced that Ms. Diener’s taxes had been calculated correctly, so they are now refusing to refund the previous tax payments.
If she were to pay the taxes in the Netherlands now, that would be double taxation, which is theoretically supposed to be prevented by an existing DTC between Germany and the Netherlands. Thus her only option is to initiate an arbitration process, whose conclusi- on is still far off. Until then, the loss in liquidity can quickly become a threat to her company’s existence.
Conclusion: Anyone who does business in another country, involving personnel and taking place with a certain degree of regularity, would be well advised to register business premises in the target country. Since these premises approximately correspond to a dependent branch, it must be seen whether this is sufficient or whether it makes more sense to found a subsidiary as a separate limited liability company, thereby creating a clear separation from the domestic activities. au- dit. Clearly defined, documented transfer prices are a helpful neces- sity here, and they can prevent unpleasant discussions during the next audit.