The creation of a permanent establishment in Germany can trigger significant tax and administrative consequences for international companies. A single employee working from home, a sales representative with signing authority, or even a rented locker can be enough to create tax obligations in Germany. At Vectocon, we combine tax law, employment law, and corporate law into an integrated solution that prevents permanent establishment risks from the outset.
What is a Permanent Establishment? Legal and Tax Definition
Under § 12 AO (German Tax Code), a permanent establishment is any fixed place of business or facility that serves the activities of an enterprise. The OECD Model Convention specifies in Article 5: A fixed place of business through which the business of an enterprise is wholly or partly carried on.
Core elements of a permanent establishment:
Fixed place of business with connection to a specific location
Power of disposition over the facility
Certain degree of permanence (typically over 6 months)
Conduct of business activities
Beyond the traditional permanent establishment, German tax law recognizes the agency permanent establishment: Individuals who conclude contracts or exercise economic authority for a foreign company can create a permanent establishment even without a fixed facility.
Typical Risk Situations for International Companies
Home Office and Remote Work
Permanent home office work carries substantial risks:
Power of disposition: Does the company pay rent or has the employee installed a company sign?
Duration: Regular use exceeding 6 months can become problematic
Activities: Are core functions or only auxiliary activities performed?
Sales Representatives and Managing Directors
Particularly risky are employees with:
Authority to conclude contracts in the company's name
Management functions (place of effective management)
Regular customer contact with negotiation authority
Project Work and Technical Services
Assembly projects exceeding 12 months (some DTAs: 6 months)
Construction and installation work
Recurring maintenance work at the same location
Tax Consequences of a Permanent Establishment
Creating a permanent establishment triggers limited tax liability in Germany:
Income taxes:
Corporate income tax: 15% plus solidarity surcharge
Trade tax: 7-17% depending on municipality
Profit attribution according to arm's length principle (AOA)
Compliance obligations:
Registration with tax authorities
Ongoing tax returns
Bookkeeping obligations under German commercial law
Transfer pricing documentation
Payroll tax:
Withholding obligations as domestic employer
Social security obligations to review
Reporting requirements under § 138 AO
Practical Avoidance Strategies
Contractual Arrangements
Optimize employment contracts:
Clear activity descriptions without representation authority
Home office policies with restrictions
Exclusion of core business functions
Documentation as preparatory or auxiliary activities
Authority limitations:
No signing authority for binding contracts
Approval requirements from headquarters
Written documentation of restrictions
Organizational Measures
Presence management:
Rotation of employees under 183 days
Use of co-working spaces instead of fixed offices
Documentation of all presence days
Structural alternatives:
Establishment of a German GmbH subsidiary
Employment through existing group company
Use of independent commercial agents
Compliance and Risk Management
Effective permanent establishment risk management requires:
Regular assessments:
Annual review of all employee activities
Documentation of cross-border activities
Analysis of new business models (workation, remote work)
Due diligence in M&A:
Review of historical PE risks
Evaluation of ongoing activities
Warranty & indemnity clauses
Tax audits:
Preparation of complete documentation
Evidence of avoidance measures
Coordination with foreign tax authorities
The Vectocon Approach: Integrated Advisory from a Single Source
As an integrated legal and tax firm, we coordinate all relevant aspects:
Holistic analysis:
Tax law evaluation of PE risks
Employment law structuring of contracts
Corporate law structuring
Pragmatic solutions:
Digital tools for presence documentation
Standardized processes for recurring cases
Fast implementation through parallel processing
Preventive advisory:
Development of company-wide PE policies
Training for HR and management
Ongoing monitoring of critical activities
Checklist: 10-Point Permanent Establishment Risk Assessment
Employees in Germany: Do employees work regularly from Germany?
Power of disposition: Does the company have control over premises?
Duration: Does the activity exceed 6 months?
Authority: Can employees conclude binding contracts?
Management: Are management decisions made in Germany?
Core business: Are essential business activities performed?
Customer contact: Do regular contract negotiations take place?
Project work: Do assembly/construction sites exceed 12 months?
Company presence: Are there company signs or public appearances?
Documentation: Is the avoidance strategy documented in writing?
Warning signal: Even 2-3 "yes" answers can indicate significant risk.
Conclusion and Recommendations
Permanent establishment risks often arise unnoticed and can have substantial consequences. The complexity requires a coordinated approach across legal and tax boundaries.
Our recommendations:
Conduct a PE risk assessment immediately
Implement clear guidelines for remote work
Document all avoidance measures
Review existing structures regularly
At Vectocon, we offer the integrated advisory you need: One contact for tax law, employment law, and corporate law. From risk analysis through structuring to ongoing compliance – we prevent permanent establishment risks before they arise.
Contact Vectocon for an individual permanent establishment risk analysis. With our integrated advisory from Darmstadt and Hanau, we support you nationwide and internationally.