When a German company conducts business in India, one of the critical considerations is whether such activities result in the creation of a “Permanent Establishment” (PE) under the India-Germany Double Taxation Avoidance Agreement (DTAA). The concept of PE is important because it determines whether India has the right to tax the profits of the German enterprise in India. Below are the top 10 frequently asked questions regarding the Permanent Establishment (PE) concept under the India-Germany DTAA, along with clear explanations on when a PE might be triggered for a German company operating in India.
What is a Permanent Establishment (PE) under the India-Germany DTAA?
A Permanent Establishment refers to a “fixed place of business” through which a company carries out business activities, either wholly or partly, in the other contracting state (India). This can include an office, branch, factory, or any other location where business activities are conducted on a regular basis. If a German company has such a fixed place of business in India, it creates a PE and becomes liable to tax in India.
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Does having a place of management in India create a PE for the German company?
Yes, a place of management in India constitutes a PE under the treaty. If a German company has its management functions, decision-making, or strategic control located in India, this would create a PE and result in taxable income in India.
If a German company has a branch office in India, does it create a PE?
Yes, a branch office falls directly under the definition of PE as outlined in Article 5 of the treaty. A branch is considered a fixed place of business, and any profits attributed to this branch would be taxable in India.
Will a German company having an office in India constitute a PE?
An office is explicitly mentioned as a form of PE under the treaty. If the German company establishes an office in India, it will automatically trigger a PE. Even if the office performs partial business functions, it will lead to tax obligations in India.
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Does maintaining a stock of goods in India create a PE for a German company?
No, simply maintaining a stock of goods for storage, display, or delivery does not create a PE, as long as no sales or further commercial activities are conducted at that location. However, if the stock is regularly sold from India, this may constitute a PE.
If a German company operates a factory or workshop in India, does this create a PE?
Yes, operating a factory or workshop in India would create a PE. A factory or workshop is considered a fixed place of business, and the income generated through such operations would be taxable in India under the India-Germany DTAA.
Does a German company involved in construction or assembly in India create a PE?
Yes, if the construction, installation, or assembly project continues for more than six months, it creates a PE under the treaty. If the project duration is less than six months, it would not create a PE, and no tax obligations in India would arise from the project.
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Will a German company providing services in India create a PE?
If a German company provides services or facilities related to plant, machinery, or mineral oil extraction in India, this constitutes a PE. Additionally, if the company has employees or representatives providing continuous services in India, such activities would likely trigger a PE under Article 5.
Does an agent acting on behalf of a German company in India create a PE?
Yes, if the agent in India is authorized to conclude contracts on behalf of the German company, this will create a PE. However, if the agent is independent and acts in the ordinary course of business, it does not create a PE. The key factor is whether the agent habitually exercises authority to bind the company in contracts.
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What activities are excluded from creating a PE under the India-Germany DTAA?
Certain activities are deemed preparatory or auxiliary in nature and do not create a PE. These include:
- Storage of goods
- Purchasing goods or collecting information
- Maintaining a business solely for preparatory or auxiliary functions
If the fixed place of business is limited to these activities, the German company would not be liable to tax in India.
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Check out our Other Article on Permanent Establishment :- https://sortingtax.com/top-10-questions…apore-tax-treaty/
