012. Tax Treaty - Independent Agent and Permanent Establishment

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In a judgement rendered on 14 September 1994 (DB 1995, 609), Germany's highest tax court has provided significant guidance as to the circumstances under which an independent agent can create a permanent establishment for its principal.

Under the OECD model treaty and most of Germany's tax treaties, an independent agent (unlike a dependent one) only constitutes a permanent establishment if it acts outside of the ordinary course of its business. Accordingly, enterprises of one contracting state can do business through independent agents in the other contracting state without being subject to tax liability in that state as long as the independent agent acts within the ordinary course of its business. Dependent agents, on the other hand, are far more likely to create permanent establishments.