Permanent business establishment in the home office of the employee

Frank Lehmann, MBA Finance / Steuerfachwirt, ORDECONTA GmbH Berlin, frank@ordeconta.com

A permanent establishment, or a business branch, in the fiscal sense in Germany, is a fixed business facility with the power of disposition of the company in which the business activity is carried out in whole or in part. Activities that are contended to the company’s purpose, such as IT activities (programming, app development), count as business activities. Activities of preparatory nature or auxiliary activities (for example, administrative activities) are not included.

According to the OECD Model Agreement 2017 for the (non-binding) interpretation of double taxation treaties, a home office permanent establishment may exist in the form of a fixed business facility if the home office is regularly and permanently used by the employee for business activities and the activity is carried out in the home office at the request of the employer. In such cases, it can be assumed that the home office is at the disposal of the company and that there is the power of disposition required for the permanent business establishment. However, if it is possible for the employee to use a workplace in the company, the employer has no power of disposal over the home office even if a large part of the work is carried out in the home office.

In particular, companies with foreign employees must exercise caution when creating permanent home office activities abroad, as non-observance of the regulations can lead to the assignment of corporate gains to a foreign home office permanent establishment. In addition to the creation of a foreign permanent establishment, there are numerous consequences for employee taxation and social security, since employee taxation is based on the principle of place of activity.

According to the updated OECD Guidelines of 21.01.2021, due to the Covid-19 pandemic, the consideration of the home office as a permanent establishment is to be dispensed with for the time being. It would be advisable, though, to check the opinion of the respective foreign tax administrations, as there may be deviations in each case. For example, the Austrian tax administration interprets the facts of power of disposal broadly and assumes a permanent establishment for an activity of at least 50% in the home office (see ÖBMF, EAS3415 of 27.06.2019).