Peter Scheller
Berater für Wirtschaftsprüfer, Rechtsanwälte, Steuer- und Unternehmensberater

„Wenn es knifflig wird.“

The unwanted permanent establishment in Germany

von Peter Scheller

The unwanted permanent establishment in Germany

Expatriates living and working in Germany are aware of the fact that relocation to Germany has consequences in regard to their tax situation. Most expatriates who live and work in Germany are employees who work for a German or foreign employer. In general they become liable to German income tax at least on their salaries. However, there is a substantial number of expatriates who are self-employed, member of a foreign partnership or shareholder of a foreign corporation (for future reference enterprise). This group of people are frequently unaware of the fact that their move to Germany may have tax consequences for their business entity (enterprises) situated abroad. A foreign enterprise who has a permanent establishment in Germany will become subject to German taxation. The same applies if the expatriate who relocates to Germany qualifies for the status as a permanent representative of a foreign enterprise.

Permanent establishment

The term permanent establishment is defined in German tax law as follows. A permanent establishment is a fixed place of business or installation which serves a business. This is especially the case for a

  • a place of management
  • a branch
  • an office
  • a factory
  • a workshop
  • a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources
  • a building site or a construction, assembly or installation project constitutes a permanent establishment only if it lasts more than six months

Germany has agreed with a lot of countries Double Taxation Conventions which narrow the scope of this provision. This is for example the case for certain auxiliary services carried out through facilities solely for the purpose of storage, display, or delivery of goods or merchandise belonging to the enterprise.

A permanent establishment requires a specific geographical point and a degree of permanence. The enterprise must carry out its business from a certain facility or place and the premises must be at the disposal of the enterprise. The facilities do not have to be the exclusive location. The facility might also be used by other persons. However, the facility must be one of the taxpayer, not another unrelated person. Therefore the regular use of customer’s premises does not generally constitute a place of business. The enterprise must carry out its business from this facility.

For expatriates the terms place of management and office are of major importance.

Place of management

The term place of management refers to a place where the management takes decisions and activities of major importance in regard to legal, organisational and economic transactions of the enterprise. The term fixed place does not require premises of the enterprise. This place of management can be in the private home of the managing director.

Example: An Irish Limited Company has its statutory domicile in Dublin. Its only shareholder and managing director relocates to Germany. This person gives up his residency in Ireland and the Ltd. has no office in Ireland. German tax authorities will argue that the place of management will be in Germany.

More complicated may be for example in the following situations:

  • The foreign enterprise have managers abroad and in Germany.
  • The manager who relocates to Germany returns frequently back to the office abroad.
  • Management decisions will be taken likewise in Germany and abroad.

In case like that it can be difficult to determine where the major place of management is located. In order to avoid controversies with German tax authorities a profound documentation showing the non-existence of a permanent establishment is advisable (e.g. management reports, minutes of the management board, travel reports).

Office as permanent establishment

An office can also determine a permanent establishment. This may be the case if an expatriate relocates to Germany and is no manager but continues to carry out work or activities for the foreign enterprise. An office is a facility where business-related services and office work is carried out. High standards on the type of premises or equipment are not required but the premises must be used for business purposes. A telephone and internet connection should be available. However, in times of smart phones and tablets the latter is of decreasing importance.

Example: A and B are members of a Limited Liability Company (LLC) formed under Californian law. The LLC is treated as a partnership. The LLC carries out IT services for international clients. A manages the business affairs and B carries out technical services of clients by internet. B relocates to Germany. He carries out his services for the clients mainly from his home office. German tax authorities claim that the LLC has a permanent establishment in Germany. They consider the study in the German apartment of B as an office.


The requirements for having a permanent establishment in Germany are not very high. If a foreign enterprise wants to prove that it has no permanent establishment a detailed and profound documentation is required in order to prove that the preconditions for the existence of a permanent establishment are not fulfilled. However, in clear-cut cases a permanent establishment in Germany cannot be avoided.

Permanent representative

A person is acting on behalf of an enterprise and has, and habitually exercises, in a state an authority to conclude contracts in the name of an enterprise, that enterprise shall be deemed to have a permanent establishment in that state in respect of any activities which that person undertakes for the enterprise, unless the activities are connected to auxiliary services as mentioned above. This does not apply if the person acts as a broker, general commission agent or any other agent of independent status, provided that such persons are acting in the ordinary course of their business.

This provision is tailored especially to activities of sales and field staff employed by foreign enterprises and working in Germany. A permanent representative is deemed to be a permanent establishment and profits of the foreign enterprise becomes partly taxable in Germany.

Tax implications in Germany

Business profits of a foreign company are taxable in Germany as far as they are attributable to that permanent establishment. If the foreign enterprise is a corporation, profits related to the establishment will be object to corporation tax and to solidarity surplus charge. The corporation tax rate is 15%. Solidarity surplus charge is computed at a rate of 5.5% of the corporation income tax.

If the foreign enterprise is a partnership respective profits will be taxed on the level of its members/partners. The income tax rate is progressive and can be as high as 45%. Solidarity surplus charge is computed at a rate of 5.5% of the income tax. This means that even partners who are not tax resident in Germany may be liable to German taxation.

The enterprise may be also liable to German trade and business tax. For more information see

Possible tax burdens are accompanied by additional administrative burdens in Germany. The profits of the foreign enterprise have to be split-up between the head office and the permanent establishment. The profit-split can be technically difficult and requires good documentation. In addition to that accounting statements, bookkeeping, tax returns and documentation of business transaction are required. This causes additional costs.

If the expatriate who relocates to Germany is an employee of the foreign enterprise the enterprise is deemed to be a domestic employer. The enterprise has to fulfil the same legal obligations as German employers, especially filing tax and social security declarations, paying withholding wage tax and social security contributions and having an extensive documentation.

Risk of a double taxation

The existence of a permanent establishment in another country involves two tax authorities. These authorities may have different options about the existence and status of a permanent establishment. For example German tax authorities may argue that a home office constitutes a permanent establishment in Germany whilst the foreign tax authorities do not qualify the home office as a permanent establishment. The tax authorities may also have different opinions about the profit share which can be attributed to the permanent establishment. These conflicting conclusions may lead to a (partial) double taxation.

Another problem occurs if the enterprise does not recognise the existence of the permanent establishment. If German tax authorities detect its existence after years in a tax audit they will assess and collect taxes. The foreign tax authorities might deny (because of formal or legal reasons) the reduction of profits or the crediting of German taxes against the foreign tax.

VAT situation in Germany

A foreign enterprise will be deemed to be a taxable person for value added tax purposes if this enterprise has its place of business or a fixed establishment in Germany.

A place of business of a taxable person is where the functions of the business’s central administration are carried out. This is the place where essential decisions concerning the general management of the business are taken, the place where the registered office of the business is located and the place where management meets (Art. 10 EU Directive 282/2011).

A fixed establishment which is different from the place of business is characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to provide the services which it supplies (Art. 10 EU Directive 282/2011).

A permanent establishment (for income tax purposes) can also be qualified as a fixed establishment (for VAT purposes). However, the term fixed establishment is less wide than the term permanent establishment. A fixed establishment requires sufficient human and technical resources to carry out its supplies or other services. However, a permanent establishment does no necessarily require the same degree of resources and especially no employees.

If a foreign enterprise has its place of business or a fixed establishment in Germany it becomes a taxable person for VAT purposes. It has to fulfil the same legal and formal obligations as any domestic enterprise. The enterprise has to charge German VAT if it supplies goods to German customers or carries out services for them. It has to file VAT returns and has to provide invoices which are in line with German VAT law. The latter applies also for services to foreign clients which are not subject to German VAT. In addition to that it has to fulfil all formal requirements in regard to documentation and proof.

If a foreign enterprise does not recognise its status as a taxable person and tax authorities detect this status after years in a tax audit they will assess and collect taxes. It can be difficult for the foreign enterprise to collect respective taxes from  customers and clients.


Corporation tax Körperschaftsteuer
Income tax Einkommensteuer
Solidarity surplus charge Solidaritätszuschlag
Trade and business tax Gewerbesteuer
Umsatzsteuer (USt) Value added tax (VAT)
Permanent establishment Betriebsstätte
Head office Stammhaus
Fixed establishment Feste Niederlassung
Place of business Sitz der wirtschaftlichen Tätigkeit
Tax return Steuererklärung
Double taxation convention Doppelbesteuerungsabkommen

Author: Peter Scheller, Steuerberater – Master of International Taxation




Kommentar von KARAN KUMAR |


I'm working for an organization named Group Futurista. We organize Conferences and seminars and we are based in India and Estonia and are planning to organize a seminar in Germany by the first week of November.

Kindly, forward the details of the procedure that we need to follow and the information that you need from our end as we wish to get out VAt registration filed as soon as possible.

(Group Futurista)​

Antwort von Peter Scheller

There might be tax imlications in the following areas:

  • Income taxation
  • Value added tax
  • Custom duties

However, more information are required to analyze the tax consequences. You need to contact a specialised tax adviser.

Kommentar von Andreia |


I recently moved to Germany and I am CEO of a Romanian start-up and main shareholder. Up until now I've been in maternity leave, but pretty soon I have to officially resume my responsibilities. Does it mean that the start-up will have a permanent establishment in Germany and will fall under German taxation?


Antwort von Peter Scheller

It sound to me that the Place of Effective Management has been moved to Germany. If this is the case the company is tax resident in Germany.

You should contact a tax adviser specialised in international affairs.

Kommentar von Josh |


What happens if you are a managing director of a UK company that is part of a group of companies and in the group of companies there are GmbH's and Limiteds? Surely if there is a tax treaty with the UK then the german tax authorities can't have an interest in it? If the UK company doesn't make any profits then can it be taxed? Can the losses be used against the GmbH?


Antwort von Peter Scheller

I think you need a really experienced tax adviser to find the best solution. There is certainly not an easy answer to you questions.

Kommentar von Ashley |


What about those that fall under the U.S./Germany SOFA agreement. Are there any exceptions in that case?

Thank you,

Antwort von Peter Scheller

Yes, German source income.

Kommentar von Peter Scheller |

A permanent establishment has three dimensions:

Geographical: locally fixed
Time: sustainable
Legal: power of disposal

Kommentar von Grace |

Well written from the point of view of expat business owners moving to Germany. Would have liked a few pointers as to what's the best course of action and kind of documentation. Even some links to international tax consultants would be appreciated. Taxation is a maze to conquer. Thanks so much.

Antwort von Peter Scheller

I am pretty sure that you do not want to discuss your case in an forum open to the public. You should send me an e-mail describing your situation and providing me with your questions.

Kommentar von Katy |


We are planning to relocate to Germany in the near future.

My partner has been working remotely as contractor for a company that has a two offices - one in the UK and one in Iceland.

We are a bit unsure whether he need set up his own company to able to create invoices or become self-employed… or something completely different.
Could you help us with this issue?

Best regards,

Antwort von Peter Scheller

You need a professional advice of a German tax consultant.

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