In 2011 a permanent establishment (PE) of a Danish company was established for income tax purposes in Germany in the form of an offshore wind farm. The PE had no employees of its own either in Germany or in Denmark. The technical and commercial management was carried out by two German service and management companies on the basis of management and service contracts. In 2013 the tax authorities issued an assessment related to taxation of assets which, according to allocation principles in the new AOA (significant people functions), would no longer be allocated to Germany. The tax authorities held that allocation of assets to the permanent establishment is determined on the basis of personnel functions exercised in the permanent establishment. If no personnel functions were carried out in the permanent establishment no assets were to be allocated to it. In the tax authorities view, this meant that the wind turbines previously allocated to the domestic permanent establishment as of 1 January 2013 would instead be allocated to the shareholder in Denmark. Due to this (new) allocation of the wind turbine, there was a transfer of assets. Consequently, withdrawal “for non-business purposes” within the meaning of § 4 para. 1 sentence 2 EStG was to be assumed, which was to be recognised at the fair market value of the withdrawn assets. An appeal was filed with the court. Judgement of the BFH The BFH clarified that Section 1 (5) AStG actually requires a reduction in income due to prices that are not at arm’s length in internal business relationships, so-called dealings, and that the allocation regulations of the income correction regulation in Section 1 (5) AStG have no spillover effect on the profit determination regulation of § 4 para. 1 sentence 3 EStG. “Insofar as the tax authorities assume in paragraph 2.2.4.1 of the BMF letter on the application of double taxation agreements to partnerships of 26 September 2014 (BStBl I 2014, 1258) that, with regard to the allocation of assets of a partnership, the principles of § 1 para. 5 AStG are “broadly consistent” with the case law of the BFH on the functional relationship, there are already doubts as to whether, within the framework of such an approach, the allocation of assets would have to be based solely on “personnel functions”. The previous case law of the Senate on this may be based on a function-based approach, but in any case it cannot be inferred that the personnel function alone would be regarded as the decisive allocation parameter” “Even if, with reference to § 1 (5) AStG, the decisive factor were to be the allocation of assets according to the “personnel function”, there are doubts as to whether, in the case in dispute, the wind turbines would have to be allocated to the management permanent establishment in Denmark because personnel functions are only exercised there. This is because it is questionable whether § 1 (5) sentence 3 AStG is to be interpreted to the effect that the relevant personnel function can only be exercised by personnel who are employed by the company as (its own) employees. In any case, the literature doubts that the personnel working in a function for the enterprise must be connected to the enterprise by an employment contract. The wording of the standard does not exclude personnel who work in this function by means of an employee leasing contract or a service contract (Andresen in Wassermeyer/Andresen/Ditz, loc.cit., margin no. 4.70). Thus, in the case in dispute, the personnel of the German service or management companies, who take over the technical and commercial management of the wind turbines on the basis of management and service contracts, would exercise a function in the domestic permanent establishment for the allocation of assets. Consequently, a personnel function would have to be assumed there” “Finally, the Senate has doubts as to whether the principles on the allocation of assets according to the personnel function are applicable at all for so-called permanent establishments without personnel under the validity of Section 1 (5) AStG. The literature points out that the principle of allocating assets according to the personnel function in such permanent establishments would result in the assets that establish the permanent establishment without personnel being allocated to the management permanent establishment……………. It is therefore considered necessary that in the case of permanent establishments without personnel — in deviation from the allocation according to the relevant personnel function — the assets that they establish and that ultimately serve the business function performed there must be attributed to them ” In any case, the tax authorities appear to support the case of a permanent establishment without a significant personnel function with reference to paragraph 75 of the OECD report on the attribution of profits to permanent establishments of 22 July 2010………, according to which, in the case of permanent establishments without a decisive personnel function, the use is to serve as the basis for the allocation of the economic ownership of tangible assets, a “different” allocation of assets is to be assumed ……. which, however, is again not beyond doubt in view of the ambiguous wording of the law (“belonging … to the enterprise”). 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Key End Es Energy concluded a share purchase and sale agreement of 20.12.2012 with a related party LUKERG BULGARIA GmbH, under which KEY END EU ENERGY transferred to its parent company LUKERG BULGARIA GmbH the ownership of the shares in eight subsidiaries. The subsidiaries owned a total of 15 wind turbines for the production of electricity and operated them on the Bulgarian energy market. According to the Purchase and Sale Agreement the price of the shares were BGN 20 935 937,75. Following an audit of the transaction the tax authorities issued an assessment of additional taxable income for FY 2012 related to the sale of shares. According to the authorities the arm´s length value of the shares were BGN 38 609 215,00. This value was determined based on a CUP/CUT method. As support/sanity check for the valuation the DCF method and the DuPont Analysis was also applied. The additional value was added to the taxable income of Key End Es Energy. A complaint was filed by Key End Es Energy with the Administrative court where, by decision No. 5477 of 09.09.2019, the assessment was annulled. The tax authorities then filed appel with the Supreme Administrative Court. In the appeal the tax authorities argued that the court erred in ignoring the valuation of the independent valuer, Raiffeisen Investment AG, on which the transaction was based and erred in holding that the agreed price was a market price. Further, it is submitted that the court erred in holding that the market price of the controlled sale and purchase transaction dated 20.12.2012 was as set out in the 2013 Share Transfer Pricing Documentation prepared by KPMG Bulgaria after the 20.12.2012 transaction. It also contested the court’s conclusions that the expert prepared in the course of the audit only formally used the CUP/CUT method, while in reality it used the discounted cash flow method, which was not provided for in Regulation No. N-9 of 14.08.2006. In view of the tax authorities, the priority should not be the formal application of the transfer pricing methods in Regulation N-9/2006, but instead arriving at actual values by means of the mechanisms of the various methods. Judgement of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court and remanded the case to another panel of the court of first instance for reconsideration. Excerpt “Since the burden of proving the substantive grounds for the issuance of the RA rests with the revenue administration, in the presence of a material difference between the conclusions of the valuation experts appointed in the course of the audit and the court proceedings, the defendant in the first instance proceedings has requested by an application filed in open court on 21.02.2018 the appointment of a valuation expert, which, having familiarized itself with all the evidence in the case, to give a conclusion under item 13 of the application in three options for the market. By admitting only the appellant’s questions and refusing to admit the questions formulated by the respondent in the proceedings at first instance to the appointed expert examination by order of 18.04.2018, the court violated a fundamental principle under Article 8(1) of the APC – the arm’s length principle and at the same time limited the right of the respondent to engage evidence in support of the thesis it defends. The infringement constitutes a material breach of the rules of court procedure and a ground for cassation under Article 209(3) of the Code of Civil Procedure and, in so far as the dispute has not been clarified from the factual point of view, the case must be referred back to another formation of the court of first instance. In the new hearing, the court should appoint a expert, which independently, using one of the applicable rules under Regulation No H-9 of 14.08.2006. The court should, in accordance with the provisions of Article N-9 of the Law on the procedure and methods for the application of methods for determining market prices, derive the market value of the shares of the eight subsidiaries owned by the audited entity, the subject of the sale both under the transaction of 20.12.2012 between related parties and as part of the subject of the sale under the transaction of 14.06.2012 concluded between unrelated parties.” Click here for English Translation Click here for other translation ...