Permanent Establishments & Profit Allocation in Tax Audits
In audits, permanent establishments become a standard focus once activities cross borders.
The decisive issue is rarely existence alone. The decisive issue is profit allocation.
Typical audit scenarios
- Where is management effectively exercised, domestically or abroad?
- Is substance and staffing abroad sufficient and provable?
- Cross-border projects or services: which unit is attributed?
- Attribution of assets or shareholdings to a permanent establishment
- Operational changes without a clear profit allocation concept
Profit allocation is fact-driven. It depends on what actually happens and what can be proven.
Weak documentation, inconsistent narratives or missing substance quickly lead to adjustments and estimates.
- Which functions are performed where, in reality?
- Where are key business decisions taken?
- Which risks are economically borne?
- Which assets or shareholdings are attributable to which unit?
- Which line remains consistent across both states?
Procedural tools matter here as well: heightened cooperation duties in foreign fact patterns,
documentation requirements and the practical risk of estimates.
A profit allocation adjustment in one state has immediate cross-border effects.
Without a corresponding position in the other state, double taxation arises.
- Will the other state share the permanent establishment qualification?
- Is the profit allocation methodically and factually consistent?
- Which line can be defended without contradiction in both states?
- Which procedural steps are needed where, to avoid later blockages?
We coordinate procedural strategy and cross-border consistency for permanent establishment and profit allocation issues in audits.
The goal is a line that holds in Germany and Switzerland and prevents or eliminates double taxation.