Germany: BFH decides on German source advertsing income derived by non-resident professional sportsmen

A German professional sportsmen moved in March 1993 from German to a low tax country. He was then during 10 years subject to the extended German income tax liability under the German Aussensteuergesetz. During 1994 and 1995 the taxpayer received income from advertsing activities in Germany. The Court reasoned that indeed the taxpayer would under the extended income tax liability be subject to German income tax for income categories which woudl not be subject to German income tax if that income would have been derived by another non-resident individual.

The German Federal Court (Bundesfinanzhof, hereafter BFH) held that this rule only applies to passive and not to active advertising income (from activities managed from outside Germany). The BFH held that the taxpayer’s centre of activities was abroad in the foreign residence, and that there business plans and strategies were developed through a permanent establishment. The BFH held that the emigrated non-resident taxpayer was only subject to tax on income derived from the passive exploitation and marketing of his personal rights (namely his name and portrait) in Germany. The BFH then referred the case back to the Court of First Instance for determining the amount of income from these passive advertising activities.

Comment: in international tax concepts may be used in various ways. In this case the source state (Germany) holds that the foreign residence constitutes a permanent establishment for German tax purposes, while the residence country of the professional sportsmen will probably consider its resident as just conducting a business within its country. The intention of the German legislator was to tax emigrated non-residents more heavily then other non-residents. This purpose will be achieved, but only regarding the income from passive income. Income from a German source which is derived by activities managed from a deemed permanet establishment outside Germany can still not be taxed by Germany.

Hopefully the Lower Court will be able to determine the income from passive activities satisfactory so that this case on the year 1994 can finally be settled.