Volume 46 (2018) / Issue 8/9
A large number of companies use the so-called representative office (or ‘rep office’) (In the regulated credit industry, the term ‘representative office’ refers to the economic activity in a branch, which, in the absence of a bank license, cannot be lead to postings of banking transactions in its books.) as an organizational form for their foreign activities in particular in the banking or financial services industry. This type of organization below the threshold of the permanent establishment (PE) is, surprisingly, still very popular despite the significant amount of legal uncertainty that it naturally entails; even more so after the measures in Action 7 (OECD, Preventing the Artificial Avoidance of Permanent Establishment Status – Action 7: 2015 Final Report 15, 28 and 42, OECD/G20 Base Erosion and Profit Shifting Project (OECD Publishing 2015).) of the OECD’s Base Erosion and Profit Shifting are gaining traction. The administrative hassle going hand in hand with the need to file tax returns if a PE has been created may be the driving force behind the non-declaration of a PE, hoping at the same time that the business operations carried out in the representative office qualify as preparatory or auxiliary. ‘Hope’, however, is not a very reliable basis for tax planning, as is currently demonstrated by the surge of tax raids in France in a number of representative offices of German companies, banks in particular. This statement will become even more true in the future because the OECD and G20 have thoroughly ‘combed through’ their catalogue of preparatory and auxiliary activities in Action Item 7 of their Base Erosion and Profit Shifting Agenda (OECD, Preventing the Artificial Avoidance of Permanent Establishment Status – Action 7: 2015 Final Report 15, 28 and 42, OECD/G20 Base Erosion and Profit Shifting Project (OECD Publishing 2015).). Consequently, in the future there will probably be no more than a few trees left in the ‘forest’ of potential representative offices. To deal with the issue of representation and its qualification for tax purposes is thus becoming a necessity, be it ex post, in arguing against the assumption of a PE for as many past years as possible, or ex ante, by thoroughly analysing and, if necessary, changing the status quo of the tax declaration of these assumed representative offices. An active management of this matter is essential in particular because the inherent risk of additional tax payments, interest and penalties does not become smaller but larger as the time progresses. Hence, ‘wait and see’ is not a real option. This carries through to the question on how much profit (or loss) would have to be allocated to such PE.
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