Permanent Establishment Germany

Permanent Establishment in German Tax Law

The permanent establishment (PE) is a central concept in international tax law. It determines whether and to what extent Germany has taxing rights over business profits. For foreign companies, the question of PE creation is often decisive for tax burden.

Definition of Permanent Establishment

Under German Law (§12 AO)

According to the German Fiscal Code, a permanent establishment is any fixed place of business or facility that serves the activities of an enterprise:

• Place of management
• Branches
• Offices
• Manufacturing facilities or workshops
• Warehouses
• Purchasing or sales offices
• Mines, quarries
• Construction sites over 6 months

Under Double Tax Treaties (Art. 5 OECD MC)

The treaty definition is narrower and typically requires:

Criterion	Requirement
Fixed Place	Geographically fixed, not mobile
Permanence	More than 6-12 months (depending on treaty)
Right of Use	Enterprise has control over premises
Business Activity	Core business is conducted (not just auxiliary activities)

When Does a Permanent Establishment Arise?

1. Fixed Place of Business

The classic PE through physical presence:

• Offices: Rented or owned office space
• Production Sites: Factories, workshops
• Warehouses: If more than just storage (e.g., delivery)
• Representative Offices: If core business is conducted

2. Construction Site PE

Regulation	Threshold
§12 AO (domestic)	6 months
DTT (OECD standard)	12 months
Individual DTTs	6-24 months (depending on treaty)

3. Agency PE

A dependent agent can create a PE if they:

• Have authority to conclude contracts
• Habitually exercise this authority
• Do not act independently (own risk)
• Act on behalf of the foreign enterprise

4. Management PE

The place of effective management is always a PE and can even lead to unlimited tax liability:

• Key Factor: Where are material decisions made?
• Relevant Factors: Board meetings, strategy development, operational management
• Risk: Unintended seat relocation if too much activity in Germany

Substance Requirements for Holdings

To ensure tax recognition and avoid abuse allegations, holding companies should have sufficient substance:

Minimum Requirements

Area	Requirement
Office Space	Own or rented office premises (not just mailbox)
Personnel	Qualified staff on-site (management, accountant)
Decision-Making	Material decisions made on-site
Communication	Own phone/fax number, email address
IT Infrastructure	Own computers, servers, internet access
Documentation	Minutes, contracts, correspondence on-site

Extended Substance (Best Practice)

• Bank Accounts: Business account with German bank
• Accounting: Bookkeeping on-site or by local tax advisor
• Contracts: Material contracts signed at registered office
• Meetings: Regular shareholder meetings at registered office
• External Presence: Website, business cards, letterhead with address

Tax Consequences of a Permanent Establishment

Tax Obligations

Tax Type	Application
Corporate Tax	15% + 5.5% solidarity surcharge on PE profits
Trade Tax	7-17% depending on municipality
Wage Tax	Withholding obligation for PE employees
VAT	For taxable supplies in Germany

Profit Attribution

PE profits are determined according to the arm's length principle:

• Functional Analysis: What functions does the PE perform?
• Risk Analysis: What risks does the PE bear?
• Asset Attribution: Which assets are to be allocated?
• Capital Allocation: Appropriate equity endowment
• Transfer Pricing: Internal services at market prices

Avoiding Unintended Permanent Establishments

Preventive Measures

• No Fixed Premises: Flexible office solutions, coworking
• Independent Agents: Brokers, agents without authority
• Limit Construction: Keep projects under DTT threshold
• Management: Make decisions abroad
• Home Office: Review arrangements carefully
• Contract Design: Do not grant authority to conclude

Structuring Alternatives

• Subsidiary: GmbH instead of PE
• Commission Model: Acting in own name
• Service Company: Separate entity for support
• E-Commerce: Sales without physical presence

Special Cases

Home Office as Permanent Establishment

Employees working from home office can create a PE if:

• The employer provides or finances the premises
• The employee performs essential business functions
• The activity is permanent in nature
• Authority to conclude contracts has been granted

Digital Permanent Establishment

Servers and digital presence can potentially create a PE:

• Server in Germany: Can be PE if core functions
• Website Alone: Generally not a PE
• Automated Contract Conclusion: Gray area, case-by-case review

Registration and Reporting Obligations

Upon PE Creation

• Tax Office: Tax registration
• Commercial Register: Branch registration (if applicable)
• Trade Office: Business registration
• Chamber of Commerce: Chamber membership
• Social Security: For employees

Ongoing Obligations

• Corporate and trade tax returns
• VAT advance returns
• Wage tax filings
• Bookkeeping and financial statements
• Transfer pricing documentation

Our Advisory Services

• Structure Analysis: Review of existing/planned activities
• Risk Assessment: Identification of PE risks
• Structuring Advice: Optimal structure for your goals
• Substance Setup: Support in meeting requirements
• Registration: Assistance with official registrations
• Compliance: Ongoing tax support