A foreign company may become liable for tax in Germany even if its registered office and management remain abroad. The decisive connecting factor is the permanent establishment. However, not every business activity in Germany automatically constitutes such a permanent establishment.
What is a permanent establishment under German law?
German tax law defines a permanent establishment in Section 12 of the German Fiscal Code (AO) as a fixed place of business or facility used by the enterprise for the purposes of its business. Typical examples include branches, offices, warehouses and workshops. Construction and installation projects may also be regarded as permanent establishments under certain conditions.
However, it is not the formal designation of a facility that is decisive, but its actual use. According to established case law, the Federal Fiscal Court (BFH) requires a permanent connection to a specific location, a certain duration, business use and a power of disposal over the premises that is not merely temporary (BFH, judgement of 7 June 2023, Ref. I R 47/20).
The right of disposal need not be based on ownership or a lease held in the company’s own name. Premises belonging to a contracted service provider may also suffice if the foreign company actually and permanently uses them for its own purposes (Federal Fiscal Court, judgement of 23 March 2022, ref. III R 35/20). Merely an occasional presence on third-party premises, however, is not sufficient.
A national examination alone is not enough
Even if a permanent establishment exists under German law, that should not be the end of the analysis. If there is a double taxation agreement (DTA) between Germany and the country in which the company is based, this must then be examined. DTAs contain their own definitions of ‘permanent establishment’, which may differ from the German definition. Only the specific agreement determines whether, and to what extent, Germany is entitled to tax the company’s profits.
This is particularly relevant in the case of construction and installation projects: German law stipulates a minimum duration of six months, though some double taxation agreements deviate from this. It is therefore not permissible to apply the German time limits across the board to the provisions of the agreement.
Practical example
A Hungarian company (comparable to a German GmbH) has its registered office in Hungary but permanently employs staff in a rented office in Germany. These employees look after clients and provide technical services. The company has permanent use of the premises under the terms of its contractual agreement.
In this case, under Section 12 of the German Fiscal Code (AO), there are strong indications that a German permanent establishment exists. The next step is to examine the double taxation agreement between Germany and Hungary before any specific tax liabilities arise.
Don’t forget your registration obligations
Where a permanent establishment is established, certain reporting obligations must be observed. Under Section 138 of the German Fiscal Code (AO), the opening of a permanent establishment must be notified to the relevant local authority, which will then inform the tax office. In addition, tax registration with the tax office must be initiated. Furthermore, a business registration under Section 14 of the Trade Regulation Act (GewO) may be required.
Check VAT separately
The permanent establishment for income tax purposes and the treatment for VAT purposes are not identical. Of particular importance is Section 13b of the Value Added Tax Act (UStG), which contains special provisions for foreign businesses. The existence of a permanent establishment in Germany does not automatically mean that a person is deemed to be resident in Germany for VAT purposes in respect of every transaction. The VAT implications should therefore be analysed separately.
Any foreign company operating in Germany, or wishing to do so, should seek clarification on the issue of permanent establishments from an early stage from a tax law perspective. The consequences of an incorrect assessment range from having to pay back taxes to breaches of registration obligations.
Source: Haufe: Tax
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