Swiss/German tax treaty: permanent establishment of taxi business at taxi radio control centre
The Tax Court of Baden-Württemberg has ruled that premises in a Swiss taxi radio control centre may constitute a permanent establishment and, as a result, the resultant commercial income may be tax-exempt in Germany.
The plaintiff, whose family residence was located in Germany, generated income through the commercial operations of a taxi firm registered in the commercial register of a Swiss canton.
He had a driver's license issued in Switzerland, a Swiss cab licence and three "A" cab owner permits issued by the cantonal police. “A” classified cabs were entitled to use public parking spaces and authorized to park in public parking lots.
The plaintiff was also a member of the cab cooperative, an association of independent cab owners running a radio control centre, through which the customer orders were processed. He registered his cab business at the registered office of the cab cooperative. As a member of the cooperative, he was obliged to "make use of the cooperative's facilities wherever possible (duty of loyalty)".
In the years in dispute, the plaintiff employed five salaried cab drivers in 2009 and four in 2010. The German tax office responsible for the plaintiff treated the income from business operations as domestic income subject to German taxation. The tax office did not consider that the plaintiff held a permanent establishment in Switzerland. Rather he ran the cab business from his private residence in Germany.
The plaintiff disputed this maintaining he performed his office work at the cab headquarters in Switzerland. He was able to use a workstation there and had a stationary container at his disposal.
During the legal proceedings, the tax office recognized the existence of a “permanent representative” permanent establishment in Switzerland and apportioned the profit between the Swiss and the domestic permanent establishment by way of estimation. This approach corresponded to the mutual agreement that the tax office had reached with the Swiss tax authorities through the mutual agreement procedure. The plaintiff, however, had not agreed to this.
The Baden-Württemberg Tax Court upheld the plaintiff’s claim. The plaintiff's income from business operations was tax-exempt and was only to be considered when calculating the rate of tax payable (so-called progression proviso).
In view of the Court, the plaintiff maintained "a fixed business establishment required for the assumption of a permanent establishment" at the premises of the cab centre. He had the right to use the office with its post-office box, which was made available to the cooperative's taxi operators, for the purposes of his own business activities and was indeed encouraged to do so by the "duty of loyalty". The ability to use the workplace jointly "therefore constituted a sufficient permanent power of disposal, and was "particularly manifested" in the case of the plaintiff through the exclusive provision to him of a stationary container, which was identified with the plaintiff's business sign and to which only the plaintiff held a key.
The plaintiff used the desk regularly once or twice a week for more than six months. From this place he made telephone calls, and attended to other correspondence, the payment of invoices as well as preparatory work for the bookkeeping and tax returns, which were prepared by a Swiss tax consulting firm. These activities constituted administrative activities which regularly occur in a business, and which are necessarily associated with the operation of a business. They do not constitute merely preparatory or auxiliary activities.
Even "subordinate operational processes" can lead to the existence of a fixed establishment. If there is a permanent establishment, it covers all business profits. The plaintiff's commercial income was fully attributable to the Swiss permanent establishment. The court was not bound by the result of the mutual agreement procedure.
The appeal was allowed due to the fundamental importance of the matter.
Baden-Württemberg Tax Court, ruling of 14 October 2021 (3 K 589/19); the appeal is pending before the Supreme Tax Court under Case No. I R 47/21.