If an individual person or a company is active abroad in business, the question arises whether and to what extent such activity leads to a taxable presence in the relevant foreign country.

The answer to this question generally depends on whether the business has a so-called permanent establishment ("PE") in that country. According to a general principle in international tax law, states are only allowed to tax business profits of a foreign enterprise if this enterprise has created a PE on their territory for carrying out business.

The concept of "permanent establishment" exists in both German domestic tax law and international tax law. If Germany, however, has entered into a double tax treaty with the relevant foreign country – which is usually the case – the terms and definitions of the treaty will take precedence. This is relevant because the treaties' PE definition is different to a certain extent compared with the German law's definition.

How PE is defined in German double tax treaties

A permanent establishment is generally defined as a fixed place where the business of an enterprise is wholly or partly carried out. In addition, this location must generally be, legally or actually, at the disposal of the enterprise (at least according to the German view hold on national and international level).

Whether these prerequisites are fulfilled depends on individual circumstances and the view held by the relevant jurisdiction. As an export orientated country, Germany is generally reluctant to recognise a company's permanent establishment in a foreign country, while import orientated countries usually hold the opposite view.

On the international level (OECD, EU), the term permanent establishment is currently being broadened. A multilateral agreement (MLI) to change certain aspects – inter alia the PE definition – of double tax treaties has been signed by Germany and several other countries, presumably to come into force for certain German double tax treaties in 2019. Additionally, the OECD Model Convention, which usually forms the basis for German double tax treaties, and the related OECD Commentary to this Model Convention were updated in November 2017 to broaden – inter alia – the existence of permanent establishments.

Although Germany currently is reluctant to apply most aspects of the broadened definition of permanent establishments, and holds firm on its conservative view, political pressure may force or have partially forced Germany to change this approach, particularly in the following situations:

  1. Home offices Due to the growth of mobile and digital solutions, home offices are widely used nationally and internationally. For example, customer call centers are often outsourced to countries where wage levels are lower, and subsequently are sometimes located in workers' homes.

    The question arises: can this home office be regarded as a permanent establishment? From a German perspective, this is usually not the case because the employer generally has no effective authority over a privately rented apartment. Jurisdictions where these home offices are located, however, might see this differently.

  2. Dependent and independent agents, sales representatives, employees

    Dependent status (abhängiger Vertreter) According to most German double tax treaties, an enterprise is deemed to have a permanent establishment when a person acts on behalf of an enterprise and has and habitually exercises authority to conclude contracts on the enterprise's behalf. This definition typically covers so-called dependent agents.

    However, this definition is not limited to an agent who enters into a contract literally in the name of the enterprise. Dependent agents can equally be someone who concludes contracts, which are binding on the enterprise even if those contracts are not actually in the name of the enterprise. What is more, such an agent may possess authority to conclude contracts where he negotiated all contractual terms, and the contract itself is only formally signed by the enterprise. In other words, a dependent-agent-permanent-establishment (DAPE) is generally assessed from an economical perspective, and exists in a grey area.

    This economic perspective is enforced and strengthened by the MLI and within the 2017 OECD Model Convention. According to the OECD Model Convention's new wording, a DAPE exists if the agent habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts without material modification by the enterprise. In other words, an authority to conclude contracts (Vertretungsmacht) is no longer a necessary or characteristic feature. Germany rejects this definition, and issued reservations on the international level.

    Independent status (unabhängiger Vertreter)

    In contrast, it is generally accepted in most current German double tax treaties that an enterprise is not considered a permanent establishment if it carries out business in a foreign state through a broker, general commission agent or any other agent of independent status, provided that such a representative is acting in the ordinary course of business.

    Independent status is generally understood to be independent from the enterprise both legally and economically. Hence, an employee cannot be considered an independent agent.

    An independent agent should typically be responsible to his principal for his work, but not subject to significant control over how the work is carried out. He should not receive detailed work instructions from the principal. The fact that the principal is relying on the special skill and knowledge of the agent indicates independence.

    Another factor in determining independent status is the number of principals represented by the agent. Independent status is less likely if the agent works wholly or almost wholly on behalf of only one enterprise over a long period. Traditionally, this fact is not in itself determinative.

    The MLI and the 2017 OECD Model Convention adjusts the situation described above. When a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related, that person should – as a rule – not be considered an independent agent (Einfirmen-Vertreter). A person is considered closely related to an enterprise generally in case of a shareholding participation of 50% and onwards. Germany, however, rejects these new adjustments.

  3. PE through performing services (Dienstleistungsbetriebsstätte) Merely performing services abroad can under certain circumstances be regarded as a permanent establishment and thus a taxable presence.

    In a few double tax treaties (e.g. with China, Liberia and Turkey) Germany has agreed upon specific provisions for permanent establishments created by the simple rendering of services. Such provisions usually take into account for how long (e.g. more than 183 days) and to which extent (e.g. by reference and comparison to an enterprise's gross revenues) services are performed. These are called genuine services PEs (echte Dienstleistungsbetriebsstätte).

    Even if a double tax treaty lacks this explicit provision, a permanent establishment can, according to the view of the international community, be established by rendering services, (e.g. if an entrepreneur performs its principal activity at the client's premises.) These are called non-genuine services PEs (unechte Dienstleistungsbetriebsstätte).

    Germany, however, does not currently share the view on non-genuine services PEs. It insists that any PE be a location that is at the disposal of the entrepreneur. In an interpretation by the German federal fiscal court, German tax authorities differentiate between where the relevant entrepreneur is only a guest within the client's enterprise (no PE) and where the entrepreneur actually performs his business at the client's premises (possible PE). Co-using premises or the mere allotment of a desk (in an open office space) shall not be sufficient for the creation of a PE. Authority over the premises needs to exist even if the entrepreneur is absent.

  4. Auxiliary activities (Hilfstätigkeiten) Certain auxiliary activities do not create a permanent establishment, such as storage facilities for display or delivery purposes as well as fixed places for merchandise or information collection purposes only. According to the MLI and the 2017 OECD Model Convention, however, such activities must overall be of a preparatory or auxiliary character. Otherwise these activities will not be excluded from the term permanent establishment. Germany has accepted this view within the MLI.

Recent EU developments

On 21 March 2018, the EU Commission published two notable directive proposals.

The first proposal suggests implementing a new digital service tax (DST) on certain revenues from digital activities. This tax shall serve as an interim solution and shall ensure that those activities, which are currently not effectively taxed, will begin to generate immediate revenues for EU member states.

The second proposal is meant to be a long-term solution and aims to implement common rules for the taxation of a significant digital presence (i.e. the taxation of a company without having a physical presence in the EU.) In other words, a new type of permanent establishment, namely a digital one, shall be introduced.

A digital platform shall have a taxable "digital presence" or a virtual permanent establishment in an EU member state if it fulfils one of the following criteria:

  • It exceeds a threshold of EUR 7 million in annual revenues in an EU member state.
  • It has more than 100,000 users in an EU member state over a taxable year.
  • Over 3000 business contracts for digital services are created between the company and business users over a taxable year.

Time will tell whether these proposals will actually be adopted.


On the international level, there is a clear tendency to broaden the term permanent establishment. Consequently, people and companies who are active in business abroad will increasingly be faced with the question: have they or have they not created a taxable presence abroad?

Even though Germany has a conservative and export orientated view on the creation of permanent establishments, the growing desire of other countries to increase their tax revenues – supported by current developments on EU and OECD level – is constantly forcing Germany to defend and re-examine its conservative view.

As a result, German businesses that are active internationally should monitor Germany's and, what is more, in particular the relevant foreign country's view on permanent establishments closely.