Tax Treaty Treatment of Start-Up Expenses in Connection with the Establishment of a PE

Abstract:

The author discusses the questions of attribution of income derived prior to the establishment of a Permanent Establishment (PE) based on a decision of the German Federal Fiscal Court. Therefore, the author gives an overview of the Court's findings, which lead to tax exemption of expenses incurred for establishing a PE, even if the PE fails. These findings are discussed thereafter with regard to the interpretation of treaties under particular consideration of the Treaty's purpose. This is because tax exemption of expenses relating to a failed PE leads to non-recognition of expenses, which may be regarded as a form of double taxation. Further, practical implications are discussed, whereat the author addresses implications of the ECJ's case law on the recognition of 'final losses' as well as of a Treaty Override clause in German Tax Law. Consequently, the author disagrees with the position taken by the Court and the German tax authorities. While attribution of income to a PE should not depend on the time when income is derived, to effectively avoid non-recognition of income, attribution should, in the author's view, not occur before existence of a PE.