BEPS MLI

Peru deposits instrument of ratification of the MLI

On 9 June 2025, Peru deposited its instrument of ratification of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI) with the Organisation for Economic Co-operation and Development (OECD). Peru confirmed its preliminary MLI positions and chose to apply all of the Permanent Establishment (PE) provisions of the MLI, excluding Article 14 (splitting up of contracts).

The MLI will enter into force for Peru on 1 October 2025.

PE case law

German court rejects taxation of PE on minority stake in US partnership

On 30 May 2025, the German Federal Fiscal Court (BFH) published decision IX R 32/23, confirming that a minority German corporate partner in a United States (US) limited partnership is not subject to German taxation under the unilateral "switchover" clause pursuant to sec. 20 para. 2 of the Foreign Tax Act. This clause only applies to certain "passive" income, as defined by the German Controlled Foreign Corporation (CFC) rules, and seeks to switch the method to avoid double taxation from exemption to tax credit. In the decided case, the German partner was treated as having a PE in the US through its participation in the partnership, which triggered the potential application of the switchover rule.

The plaintiff, a German corporation and member of a multinational group, held a 30% interest in a US-based limited partnership. The partnership generated income by licensing the group's brand to both related and unrelated parties. Under US federal tax rules, the partnership was treated as transparent, so income was attributed directly to its partners. Although some of the licensing income was subject to US tax, a portion (particularly from related-party transactions) was not subject to US taxation. German tax authorities sought to apply the switchover clause on the grounds that the partnership's income was undertaxed passive income and should therefore be taxed in Germany.

The BFH upheld the Dusseldorf Tax Court's decision, clarifying that the switchover clause applies only if the German taxpayer holds a controlling majority in the foreign entity that constitutes the permanent establishment, similar to the requirement for CFCs. Because the plaintiff held only a 30% interest and had no special rights or control, the clause could not be triggered. The court emphasized that the switchover clause serves an anti-abuse purpose rooted in CFC principles, which presuppose control through majority ownership. It noted that interpreting the switchover clause at the level of the PE, rather than the legal entity, would extend the rule's scope as a secondary anti-abuse rule beyond the scope of the primary anti-abuse rule (the German CFC rules) and could lead to disproportionate taxation of minority foreign holdings.

German court rules on PE profit attribution

On 8 May 2025, the German Federal Tax Court (Bundesfinanzhof, or BFH) published two key rulings (I R 45/22 and I R 49/23, dated 18 December 2024) addressing the limits of profit attribution to PEs under the Authorized OECD Approach (AOA), which is implemented in Germany under section 1 (5) of the Foreign Tax Act (FTA).

The cases concerned two Hungarian entities with PEs in Germany. Both operating exclusively for third-party customers, one provided assembly services and the other focused on meat processing. The Hungarian head offices negotiated contracts and arranged staffing through unrelated local firms, but they did not charge the PEs for these activities. Nonetheless, the German tax authorities assumed the existence of a so-called "dealing" between the German PE and the Hungarian head office, rejected the existing PE profit determination and sought to impose a markup on the PEs' personnel costs based on the cost-plus transfer-price method.

The BFH rejected this approach, holding that section 1 (5) FTA does not provide a sufficient legal basis for rejecting an existing profit determination and replacing it with a cost-plus adjustment without further investigations, given that that section 1 (5) FTA is purely an income adjustment rule and not an independent provision for determining PE profits.

The BFH rejected the administrative guidance issued by the Federal Ministry of Finance, which is binding on the tax authority but not on the courts and cannot override the language or intent of the law.