Permanent establishment risk in Germany – a risk for many companies doing business in Germany
Constituting a permanent establishment for tax purposes in Germany often entails considerable tax risks, as permanent establishments are often not recognized and / or properly registered too late or not at all. In additional to a permanent establishment created by a fixed place of business in Germany, especially construction and installation projects in Germany as well as permanent representatives can lead to a German permanent establishment from a tax perspective.
Appropriate internal guidelines and raising awareness among the relevant employees are essential in a company that operates beyond the borders of the relevant country. This risk is not only present for large global organizations, but also for small and medium-sized companies which conduct cross-border business.
- Constitution of a permanent establishment in Germany
In general, a permanent establishment for tax purposes in Germany is constituted by the existence of a fixed place of business or facility (e.g. branch offices, warehouse, place of management) in Germany, through which the activities of a foreign company are carried out in full or in part in a sustained manner.
In addition to the mostly relatively clear and definable general principles, a permanent establishment for tax purposes in Germany can also be constituted in the following cases without the existence of a fixed place of business:
- Building sites or constructions or installation projects
Activities in respect of building sites or constructions or installation projects carried out in Germany can constitute a permanent establishment for tax purposes if they are carried out over a certain period of time. German tax law considers a duration of more than 6 months to be harmful - double taxation agreements concluded by Germany usually provide for 12 months and only sometimes 3 or 6 months.
Practical note:
When determining the relevant time period, it may happen that the activity times of subcontractors are also included. Interruptions (e.g. due to weather or strikes) or remedial work can also result in the project duration being exceeded unplanned. Furthermore, different projects for the same customer may also be added together if there is a certain connection.
- Permanent representative
A so-called representative permanent establishment in Germany with a permanent representative can be established by the fact that a person in Germany conducts the business of a foreign company for the foreign company on a sustained manner and is subject to its instructions.
Practical note:
Representative permanent establishments can be constituted in particular by sales employees. If these employees work in Germany, it is therefore essential that they are made aware of this issue.
Appropriate internal guidelines and raising awareness among the relevant employees are essential in a company that operates beyond the borders of the relevant country. This risk is not only present for large global organizations, but also for small and medium-sized companies which conduct cross-border business.
- Consequences of constituting a permanent establishment in Germany
A German permanent establishment for tax purposes is not an independent legal entity such as a German subsidiary but forms a legal entity with its foreign head office. For tax purposes, however, a permanent establishment is assumed to be independent and therefore has limited tax liability in Germany. The corresponding profits of the permanent establishment are taxable in Germany.
Depending on the double taxation agreement and the respective local tax regulations, the permanent establishment profits taxed in Germany may be exempt from taxation abroad or the German tax will be offset against the local tax abroad.
For a more detailed overview of the risk associated with a PE in Germany see our SuP OnePager
