Permanent establishment of a German operational facility in India

This article explains some relevant aspects regarding the foundation of a German operational facility in India in the context of the agreement on the avoidance of double taxation between India and Germany, that is, The Double Taxation Avoidance Agreement, or DTAA for short.

This article is for informational purposes only. Consultinghouse does not provide tax advice, but is committed to supporting clients in sourcing a tax advisor and / or lawyer where needed, to support extended business requirements.

Types of operational facilities

In principle, different kinds of operational facilities can be set up under the DTAA and can be divided up under the following headings:

  • Stationary operational facilities
  • Construction site (construction operational facilities
  • Installation or assembly (production operational facilities)
  • Supervision
  • Letting of equipment (Betriebsstätten)
  • Agency (-operational facilities)

The articles of the German Indian agreement to the avoidance of the double taxation (DTAA) cover cases in which a German enterprise establishes a stationary, permanent establishment (PE) in India, as well as when an Indian company establishes a business in Germany.

One can assume that such German enterprises ordinarily establish a stationary PE in India which meets the following criteria:

  • There is a definite business location in India; 
  • The business of the German enterprise is led by such a business seat out;
  • This branch office is only available to the German enterprise; and 
  • A certain degree of resistance is connected at and with this business seat. 

The OECD guidelines provide that the existence of a stationary business seat would generally be viewed as a permanent one for at least 6 months. However, one cannot take this as a rule of thumb, since it could be viewed differently depending on the line of business and its actual condition. Article 5 (2) contains an exemplary listing of stationary PEs for example: as the seat of the business operation, a branch office, offices, storage places, as well as operational facilities for construction, installation, assembly or supervision.

The following businesses can form a PE according to the DTAA, if they last more than six months:

  • Construction site, or
  • Construction, assembly or installation project, or
  • Control and supervision, if it is connected with a construction site, assembly activity or the like.

In the event that the period of six months is exceeded, the PE applies as being founded from the beginning of the project. Conversely, those projects which don't last longer than six months normally aren't regarded as PEs under this definition.

Particulars German Limited (GmbH) Subsidiary Company Branch or Permanent Establishment

Taxation in Germany 
Earning before tax 2'000'000  2'000'000  2'000'000 
(-) Income corporate Taxes @ 15% 300'000  300'000 300'000
Surplus tax 5.5 % of Corp. Tax 16'000 16'000 16'000
Profit after tax 1'689'500 1'689'500 1'689'500
Taxable income 1'689'500 1'689'500 1'689'500
Trade tax 3,5%*400% 280'000 280'000 280'000
Profit after tax 1'403'500 1'403'500 1'403'500
Dividend distributed 1'403'500 1'403'500 1'403'500
Tax Withheld on Dividend 26,375% 370'173 370'173 -
Dividend Equivalent Amount - - -
Branch level tax - - -

Taxation in India 
Taxable income 1'403'500 1'403'500 2'000'000
Tax Liability @ 33.99% 477'050 477'050 679'800
(-) Foreign Tax Credit as per DTAA - - 300'000
Balance tax payable in India 477'050 477'050 379'800
Total tax outflow 1'443'723 1'443'723 1'276'300

Letting of equipment

Article 5 (3) of the DTAA stipulates that an enterprise which offers services or facilities, or provides plant and machinery in connection with the search for, or the promotion or mining of mineral oil in India is regarded as a PE in India.

Article 5 (5) of the DTAA is commonly known as a Dependent Agent PE. According to this article a person proceeding in India can form a PE for a German company provided that this person:

  • Has the authority to conclude contracts in the name of the German enterprise (exceptions are possible) or
  • has had stock passed, which is delivered for the German enterprise or
  • receives orders (almost entirely) for the German enterprise or other enterprises which are connected to it.

Exceptions to a Permanent Establishment

Article 5 (6), however, describes exceptions in which an independent agent in the practice of his ordinary business activity doesn?t need a PE for the German enterprise if the business relations between this agent and the enterprise are completely independent.

Article 5 (4) of the DTAA describes an essential exception, if company representations only deal with preparing or supporting activities. This one doesn?t lead to the foundation of a PE. This paragraph considers activities and installations which for this purpose

  • taking care of a warehouse with stock, which is used exclusively by other enterprises as a store, an exhibition, a processing centre, to take deliveries or to look after a goods depot of the enterprise, or
  • buying goods or collecting information etc.

To be considered as exception under the DTAA, it has to be guaranteed, though, that the Indian business presence deals exclusively with the aforementioned activities.

Martin Wilke

Managing Director
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