Concepts of Permanent Establishment (PE) - Free Essay Example

Sample details Pages: 5 Words: 1556 Downloads: 4 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? Table of Contents Concepts of Permanent Establishment (PE) US: Effectively Connected Income German Domestic Definition of PE Legal analysis of given situations Situation 1a: run business directly with PE Situation 1b: run business with PE through a German GmbH Situation 2a: the sole trader holds the shares of a US corp. directly. Situation 2b: the sole trader holds the shares of a US corp. through a German GmbH. Steps of calculation Final results References Calculations: Concepts of Permanent Establishment (PE) US: Effectively Connected Income According to the US tax law, a foreign company is subject to US corporate tax on its à ¢Ã¢â€š ¬Ã‹Å"effectively connectedà ¢Ã¢â€š ¬Ã¢â€ž ¢ income if it à ¢Ã¢â€š ¬Ã‹Å"engaged in a trade or business within the United Statesà ¢Ã¢â€š ¬Ã¢â€ž ¢ this concept is much broader than the concept of permanent establishment.[1] However, the United States employed the PE concept in most of its treaties, which overrides the national law.[2] Thus, the PE concept is more relevant in international circumstances.[3] Income is said to be effectively connected if it is anchored in assets which are used or to be used in the US, and such activities of the US entity were related to core business.[4] Usually, all income that arises within the United States related to a trade or business is regarded as Effectively Connected Income (ECI), in case that the trade or business is conducted in the United States by a foreign person. This applies whether or not the income relates to the trade or business ta ken place in the United States, during the tax year. It is taxed at stated rates or lower treaty rate.[5] Don’t waste time! Our writers will create an original "Concepts of Permanent Establishment (PE)" essay for you Create order German Domestic Definition of PE According to domestic law (section 12 of the AO), à ¢Ã¢â€š ¬Ã…“a permanent establishment is a fixed place of business which serves the business activity of the company.à ¢Ã¢â€š ¬Ã‚ [6] The three main differences between the OECD Model Convention and domestic law concern warehouses, installation projects and agents.[7] In accordance with domestic law, warehouses are considered à ¢Ã¢â€š ¬Ã…“permanent establishmentsà ¢Ã¢â€š ¬Ã‚ , whereas the OECD Model views this otherwise because the activities of warehouses are regarded as auxiliary.[8] In line with domestic law, installation and construction projects may be considered a à ¢Ã¢â€š ¬Ã…“permanent establishmentà ¢Ã¢â€š ¬Ã‚  if their duration exceeds 6 months, whereas the duration stated in the OECD Model is 12 months.[9] While the OECD Model Convention focuses on dependent agents, and thus usually disregard independent agents, such as commissionaires as PEs, a à ¢Ã¢â€š ¬Ã…“permanent establishmentà ¢Ã¢â€š ¬Ã‚  u nder domestic law may also include independent agents.[10] Legal analysis of given situations Situation 1a: run business directly with PE Business income: in a no treaty situation, such income would have been subject to personal income tax in the US, and personal income tax in Germany. However, the US German tax treaty eliminated the German taxing right with article 23 paragraph 3 item a.[11] Personal tax burden in the US is calculated by fist determining the state tax obligation then subtracting the amount from the total taxable income to determine the tax base for federal personal income tax and then multiply it by the tax rate.[12] Situation 1b: run business with PE through a German GmbH Business income: in a no treaty situation, such income would have been subject to corporate income tax in the US, and personal income tax in Germany. However, the US German tax treaty eliminated the German taxing right with article 23 paragraph 2 item a.[13] Corporate tax burden in the US is calculated by fist determining the state tax obligation then subtracting the amount from the total taxable income to determine the tax base for federal Corporate income tax and then multiply it by the tax rate.[14] Dividends: subject to personal income tax in Germany. According to Article 29 paragraph 7 of GewStG, the dividend is deductible from the tax base of local business tax.[15] 60 percent of the dividend received by the sole trader is subject to personal income tax.[16] However, the sole trader may also opt for a reduced rate on all dividend, here this option is used.[17] Situation 2a: the sole trader holds the shares of a US corp. directly. Business income: since the subsidiary is a legal entity in the US, the income of the subsidiary should only be taxed in the US. Germany does not have taxing right so long as the profits are not distributed. Corporate tax burden in the US is calculated by fist determining the state tax obligation then subtracting the amount from the total taxable income to determine the tax base for federal corporate income tax and then multiply it by the tax rate.[18] Dividends: in a no treaty situation, such dividends would have been subject to dividend tax in the US, and personal income tax in Germany. However, with the existence of a treaty between US and Germany, article 10 paragraph 2 item b of the treaty should apply. In that case, the US government may charge up to 15 percent of the dividend.[19] According to article 23 paragraph 2 item b of the treaty, the dividend withholding tax should be given a tax credit when considering the tax burden in Germany.[20] Dividend is not subject to loca l business tax at the level of the sole trader.[21] Situation 2b: the sole trader holds the shares of a US corp. through a German GmbH. Business income: since the subsidiary is a legal entity in the US, the income of the subsidiary should only be taxed in the US. Germany does not have taxing right so long as the profits are not distributed. Corporate tax burden in the US is calculated by fist determining the state tax obligation then subtracting the amount from the total taxable income to determine the tax base for federal corporate income tax and then multiply it by the tax rate.[22] Dividends: in a no treaty situation, such dividends would have been subject to dividend tax in the US, corporate income tax in Germany and German personal income tax. However, with the existence of a treaty between US and Germany, article 10 paragraph 3 item a of the treaty should apply. Therefore, the taxes are not charged by the US authorities.[23] According to German tax code, the dividend paid to the German GmbH is tax exempt, however, 5 percent of which will be added back to the corporate income tax base as non-deductible busi ness expense.[24] 60 percent of the dividend received by the sole trader is also subject to personal income tax.[25] However, the sole trader may also opt for a reduced rate on all dividends, here this option is used. Dividend is not subject to local business tax at the level of the sole trader.[26] Steps of calculation Calculate State tax on business income, which is always 0 for Texas. The tax base of US federal tax is the amount of income net of state tax. The amount net of US taxes is the base of US withholding tax (if applicable) on dividends and German dividend tax/ income tax. In case of a German GmbH, 5% of the base is taxable at CIT rate. The net amount is the tax base of German PIT. Calculate the PIT and apply any tax credit if applicable. Final results Following these steps, one shall discover that the best strategy here is to invest directly in a US permanent establishment. This is because the CIT has to be taxed in the US and is not credited in any situation. Thus the only way to avoid economic double taxation is to have all taxes taxed at the level of the sole trader. References Germany (2006) Protocol amending tax convention with Germany: message from the President of the United States transmitting Protocol Amending the Convention Between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, signed on August 29, 1989, signed at Berlin June 1, 2006 (the #034;protocol#034;), along with a related joint declaration, International Bureau of Fiscal Documentation (2004),IBFD, your portal to cross-border tax expertise,https://online.ibfd.org/document/cta_de_s_7. Reimer, E. (2011) Permanent establishments : a domestic taxation, bilateral tax treaty and OECD perspective, Alphen aan den Rijn[u.a.] Calculations: Situation 1a: US federal personal income tax base 100 US federal personal income tax 35% 35 Total tax burden 35 Situation 1b: US federal corporate tax base 100 US federal corporate income tax 35 Amounts paid to German GmbH 65 Dividend paid to sole trader 65 German personal income tax25% 16.25 Tax burden 51.25 Situation 2a: Taxable income in US 100 US corporate tax 35 Dividend paid to sole trader100-35 65 US dividend tax under treaty15% 9.75 Tax base in Germany 65 PIT 25% 16.25 Tax Credit 9.75 Personal tax 6.5 Tax burden 51.25 Situation 2b: Taxable income 100 -US corporate tax35% (no state tax in Texas) 35 Dividend paid to German GmbH 65 CIT taxable income 5% 3.25 -German corporate tax 25% 0.8125 Tax base for German Personal income tax 64.1875 German personal income tax 25% 16.046875 Tax burden 51.859375 1 [1] See Reimer (2011) pp. [2] See Reimer (2011) pp. [3] See Reimer (2011) pp. [4] [5] [6] International Bureau of Fiscal Documentation (2004) [7] International Bureau of Fiscal Documentation (2004) [8] International Bureau of Fiscal Documentation (2004) [9] International Bureau of Fiscal Documentation (2004) [10] International Bureau of Fiscal Documentation (2004) [11] See Germany (2006) pp. [12] International Bureau of Fiscal Documentation (2004) [13] See Germany (2006) pp. [14] International Bureau of Fiscal Documentation (2004) [15] International Bureau of Fiscal Documentation (2004) [16] International Bureau of Fiscal Documentation (2004) [17] International Bureau of Fiscal Documentation (2004) [18] International Bureau of Fiscal Documentation (2004) [19] See Germany (2006) pp. [20] See Germany (2006) pp. [21] International Bureau of Fiscal Documentation (2004) [22] International Bureau of Fiscal Documentation (20 04) [23] See Germany (2006) pp. [24] International Bureau of Fiscal Documentation (2004) [25] International Bureau of Fiscal Documentation (2004) [26] International Bureau of Fiscal Documentation (2004)