On 5 February 2024, the German Ministry of Finance (MoF) issued revised instructions concerning the criteria for a permanent establishment (PE), as commonly outlined in section 12 of the General Tax Code for the purposes of domestic tax law. According to the latest guidance, a home office utilized for remote work is typically not deemed eligible as a permanent establishment (PE).
The most important changes to the updated guidance are outlined below:
- A PE necessitates a fixed place of business with a degree of permanency where enterprise activities are conducted.
- Business activities at a third party’s premises may create a PE if authorized and if enterprise personnel work there.
- The enterprise must have a valid legal right to use the place, which cannot be withdrawn or changed without further action.
- Employee activities in a home office usually do not create a PE, even if the employer covers expenses or enters into a rental agreement, unless the employer has significant control over the space.
- Transferring activities to an independent third party generally does not create a PE, unless the enterprise conducts its own activities there with permanency.
- Every enterprise has a management-PE where management decisions are made, including in the private homes of individuals.
- The PE definition also applies to self-employed individuals, farmers, and foresters.
- German tax law determines PE unless a specific double tax treaty states otherwise.
These guidelines ensure clarity on PE determination and its application to various professional scenarios under German tax law.
