The German Commissionaire as a Permanent Establishment Under the OECD Model Treaty Dr Heinz-Klaus Kroppen and Stephan Huffmeier, Deloitte Touche, GmbH, Dusseldort 1.Introduction international groups have considered fundamental changes to their European distribution structures. The following is an example of such a change: rldwide activities which, in the past, has sold its ry, B GmbH, in such a way that B its own account and then sold the customers. In the future B cial Code which means that B will sell the c ill be B's sole principal. In the follo ales of the OECD Model reaty ent for A in the Federal Republic of 2. Commissionaire ing to Domestic Law neone whose one else. subject to cedures t Establishment under the se Art.5(6) ment does interta
THL GERMAN COMMISSIONAIRE AS A PERMANENT ESTABLISHMEI ordinary course of his own business shall not constitute a permanent establishment for someone else. 'A decisive factor is the responsibility of the entrepreneur for his own business and his business decisions. If this independence does not exist in a particular case, a permanent establishment may be deemed to arise. Accordingly, even though a commissionaire is explicitly referred to in the German version of the oECD Model, it is essential that the commissionaire is dependent within the meaning of the Model if it is not to constitute a permanent establishment of the foreign entrepreneur 4. Independence of the agent According to Art. 5(6), a permanent establishment does not exist merely because an enterprise carries on business in the other state through an independent agent who is acting in the ordinary course of his business. For the interpretation of the term independent it is clear that the legal dependency of a subsidiary on its parent company is not sufficient for assuming dependency the meaning of Art. 5(6)(see Art. 5(7). Besides this, the meaning and scope of the term independent in relation to the existence of a permanent establishment is subject to alternative interpretations that any agent who concludes contracts in the name of the principal always constitutes a permanent establishment, even though he might be otherwise independent. This is based on the examples used in Art. 5(6)(broker and commissionaire) who are agents acting in their own names. Therefore, the supplementary sentence ' or any other agent of independent status'has to be interpreted in the light of those examples so that only an independent agent who did not act in the name of the principal would fulfil Art. 5(6) and would not constitute a permanent establishment In our view it is irrelevant in whose name the agent is acting in determining whether the exclusion from the existence of a permanent establishment according to article 5(6) applies According to the wording of this article, the decisive criteria for the exemption from a permanent establishment are independence' and acting in the ordinary course of one's business'. The wording or another agent of independent status' is referring to the criterion independence which is a typical characteristic of a broker or commissionaire. It is not referring to the criterion concluding contracts in the name of the enterprise'because this is not even mentioned in Art. 5(6). Therefore, using the criterion concluding contracts in the name of the ha aragraph 38 of the Commentary to the OECD Model states with respect to' dependence that where the person's commercial activities for the enterprise are subject to detailed instructions or to comprehensive control by it, such a person cannot be regarded as independent from the enterprise. From this it has been concluded that it is decisive whether the agent is organisationally bound by the directions of the principal so that an agent who acts only for one principal can be regarded as an independent agent. 'However, the main criterion is economic economically independent from that one principal. In reality such an agent will very often be factually bound by the directions of this principal in the same way as if he were legally dependent.In practice the tax authorities often assume the economic dependence of a one-firm agent on its parent company In contrast to the OECD Model, the UN Model provides that an agent who acts exclusively or almost exclusively for one enterprise is not an independent agent(Art. 5(7). Hence, the one- firm agent is deemed to be dependent. Under the OECD Model a one-firm agent can be dependent or independent according to the actual circumstances 5. Acting in the Ordinary Course of Busine Even if an agent can be viewed as independent according to the criteria described above, Art 5(6)of the OECD Model is only applicable if this agent acts in the ordinary course of his business. In determining what represents the ordinary course of the agent,s business it is not ignificant which actual activities a certain agent conducts because under such a test each branch Vogel, Commentary to the OECD Model Treaty, Art. 5. No 188 ntertax 1993, p. 396 Commentaries from the Civil law view intertas With the same result: BFH, BStBI, II 1995, p. 283; Jacobs, International Taxation of Enterprises (Interna
THE GERMAN COMMISSIONAIRE AS A PERMANENT ESTABLISHMENT of the existing activities would lead to a permanent establishment The normal business activities of the group of agents to which the agent belongs are significant, however Paragraph 38 of the Commentary to the OECD Model states in this context that, for example, a commissionaire who not only sells an enterprise's goods in his own name but also habitually acts in relation to that enterprise as a permanent agent having an authority to conclude contracts would be deemed, in respect of this particular activity, to be a permanent tablishment, since he is thus acting outside the ordinary course of his own trade or business This statement, however, should only be seen as referring to the particular activity of the commissionaire described. In practice it is quite common that a representative always acts as a ommissionaire for one enterprise and always as an agent for another. In such a case it is not orrect to assume that this representative did not act in the ordinary course of his business for both enterprises because he acts in his own name for one principal and in the name of the principal for the other. Rather, it is significant whether the representative remains within the ordinary scope of activities of the pertinent group of representatives in his business relationship with each of his customers. The same is also applicable when the representative for one enterprise always acts as a commissionaire for one product group and as an agent for another 6. Conclusion of Contracts by the Agent in the Name of the Enterprise If the agent is not independent or does not act in the ordinary course of his business, a permanent establishment of the foreign entrepreneur does not automatically exist, but has to be decided according to Art. 5(5)of the OECD Model. It is then important whether the agent has and habitually exercises authority to conclude contracts in t the name of the enterprise. In respect of a typical commissionaire under the HGB it has been clearly concluded in the past that he could not create a permanent establishment according to Art. 5(5)because under s 383 HGB the commissionaire only concluded contracts in his own name with a third party.Therefore, the condition for a permanent establishment under Art. 5(5)was not fulfilled This interpretation has been called into doubt arising from a change in the Commentary the OECd Model on 31 March 1994. Paragraph 32 of the Commentary has been amended follows: Also, the phrase authority to conclude contracts in the name of the enterprise'does not fine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise; the paragraph applies equally to an agent who concludes contracts which are binding on the enterprise, even if those contracts are not actually in the name of the enterprise However, the history of this amendment shows that the legal situation in the Federal Republic of Germany has not been changed by it. Before the amendment of para. 32 of the Commentary the United Kingdom had made an observation on the old para. 45 of the Commentary which stated that'the United Kingdom considers that an agent who is not an agent of independent status within paragraph 6 of this article and who has the characteristics described in paragraph 32 and 33 above will represent a permanent establishment of an B terprise, if he has the authority to conclude contracts on behalf of that enterprise whether in own name or that of the enterprise The UKs observation on para. 45 of the Commentary was deleted when the above 32 the OECD was to account for this. The concern expressed by the UK was that under common law principles an agent can conclude binding contracts for the principal without actually acting in the name of the principal (undisclosed agency). 2 In this case the UK wanted to ensure that a permanent establishment would exist. Therefore, the amendment of para. 32 of the Commentary may only account for the UK's view formerly stated in its observation on para Consequently a permanent establishment only exists if according to the applicable provisions of domestic law, the agent concludes contracts for the enterprise which are legally binding on the enterprise. This is explicitly stated in para. 32 of the Commentary. For a German ommissionaire this condition is, however, not fulfilled because the contracts concluded by him are only binding on himself but not on the enterprise for which account he is acting. A 8FL, BStBI, I1 1996, p. 2 See OECD Committee on Fiscal Affairs, Model Tax Convention on Income and Capital, Art. 5-History, p 21 Sce for details Avery-Jones and Ward, 'Agents as Permanent Establishments under the OECD Model T onvention, British Tax Review 1993, p. 341 Kolb and Lithi, Uberblick uber die Teilrevision 1984 des OECD-Musterabkommens, IWB F10, Gr. 2, p 1059 intertas Baumbach Duden, Hopt, Commmercial Code(HGB).$ 383, No 14
THE GERMAN COMMISSIONAIRE AS A PERMANENT ESTABLISHMENT German Commercial Code commissionaire therefore does not lead to a permanent establish ment in accordance with Art. 5(5 7. Change from a Sales Company to a Commissionaire In the above example B's situation has been changed from a sales company to a commissionaire by changing the contracts and reallocating the risks n this context it is questionable whether B should be compensated by A for accepting this change in its legal position to avoid the threat of a deemed dividend distribution under German tax law. This could, for example, represent the transfer of an intangible(transfer of a market or of customers) or lost future revenues It may, however, be argued that no deemed dividend should be assumed if such compensation payment is not made. An independent third party could not require such a compensation under German commercial law if its existing sales company contract was terminated and change into a commissionaire arrangement According to the longstanding jurisdiction of the German Supreme Court a claim for compensation by a sales company is governed by the same provision(s 89b HGB) which is applicable to agents. According to this jurisdiction a compensation claim is not valid if the sales company is obliged to transfer its customers and customer list to the principal on the termination of the contract and it actually makes such a transfer. 6 On the change of the contractual relationships from a sales company to a commissionaire all customers and the customer list remain with the commissionaire; from the viewpoint of the customer nothing has been changed, since his sole contract partner is the same person. The change in capacity to a commissionaire is intermal within the foreign entrepreneur's group Therefore, between independent third parties no claim for compensation of the new commissionaire would exist In addition it cannot be argued that the new commissionaire has given up future profits if the transfer prices for his capacity as buy /sell distributor and as commissionaire had been at arms length. The compensation paid has to reflect the functions performed and the risks assumed Each additional function increases the risk and vice versa. Over the total period of existence th profits of a commissionaire and of a buy/sell distributor should be equal, since the buy/sell tributor has higher earnings but also has a higher risk of liabilities materialising, so that the total profit of both should be equal if the compensation truly reflects the functions and risks interfax 5ibid.§84