At first sight, the issue appears straightforward. Some may argue that the place of effective management is simply where the company’s registered office is located. Others might contend that it is where the managing director takes decisions. The latter view already comes relatively close to what the German tax authorities consider to be the place of effective management.
According to the tax authorities, the place of effective management is not confined to formal aspects such as the company’s registered office as recorded in the commercial register. Rather, the decisive factor is where key management and commercial decisions are effectively made. The place of effective management comprises the ongoing conduct of business, i.e., the actual managerial and legal acts that constitute the company’s ordinary operations. As a rule, it is located where the individuals authorized to represent the company genuinely perform their management functions – often at the managing director’s residence or office.
This approach demonstrates that a company’s statutory seat does not necessarily determine its place of effective management. While this may already give rise to disputes with the tax authorities in the case of German companies with managing directors resident in Germany, it becomes an even more critical issue where managing directors reside abroad.
The determination of the place of effective management is of fundamental importance when assessing the residence of a corporation and, consequently, its unlimited tax liability. Pursuant to Section 10 of the German Fiscal Code (AO), “management” is defined as the centre of top-level commercial management. This vague definition has been further refined by case law and the administrative guidelines to Section 10 AO (AEAO). While the formation of key managerial decisions is relevant, particular emphasis is placed on day-to-day operations. Day-to-day business comprises the full range of activities inherent to the ordinary course of a company’s operations. This is precisely where numerous pitfalls may arise, particularly when managing directors reside outside Germany. The greater the distance between the company’s statutory seat and premises, on the one hand, and the managing director’s residence, on the other, the more likely the tax authorities will challenge whether the place of effective management is in fact located in Germany.
If a GmbH has its registered office on the German side of Görlitz, while its managing director resides on the Polish side of the city, this is unlikely to pose difficulties. However, if the company is seated in Stuttgart and the managing director resides in Gdańsk, the situation is far more problematic. In such circumstances, the company and its managing director bear the burden of proof to demonstrate that the place of effective management is located in Germany – and not in Poland. Such scenarios may even result in the unintended creation of a permanent establishment in another jurisdiction, together with all ensuing tax consequences.
Under Section 12 sentence 1 AO, a permanent establishment is defined as any fixed place of business or facility serving the activities of an enterprise. In particular, the place of management qualifies as a permanent establishment pursuant to Section 12 sentence 2 no. 1 AO. Likewise, Article 5(2)(a) of the OECD Model Convention includes the place of management within the definition of a permanent establishment. Accordingly, should the tax authorities review the place of effective management – for instance, in the course of a VAT audit – it is prudent to be thoroughly prepared. Evidence may include office agreements (whether a lease or premises provided by a service provider/virtual office) as well as travel records such as mileage logs and hotel receipts. Such documentation can serve as persuasive indicators that day-to-day business is in fact conducted at the registered office, notwithstanding geographical distance. Case law also underlines the need for a case-by-case assessment. To avoid such risks, it is advisable to address and structure the issue of the place of effective management from the outset.
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