I. Introduction

Since the start of the coronavirus pandemic in particular, more and more employees have taken advantage of the opportunity to work remotely from home (“remote working”). This trend is being reinforced by the shortage of skilled workers and increasing digitalization. However, remote working also has tax consequences. In the area of international tax law, remote working – and thus, for example, the employee’s own home – can constitute a permanent establishment of the employer. The German Federal Ministry of Finance (BMF) recently issued an administrative letter on the question of the conditions under which such remote working constitutes a permanent establishment.

II. General requirements for establishing a permanent establishment

1. General clause of § 12 sentence 1 AO

The concept of a permanent establishment is regulated in national law in § 12 AO (German Fiscal Code). According to the general clause of § 12 sentence 1 AO, a permanent establishment is any fixed place of business or facility that serves the activity of the company.
A business establishment is any physical object or group of physical objects that are suitable for serving the activity of the company. There must therefore be a certain relationship between the business equipment or facility (as a sub-form of business equipment) and the business.
A business facility or installation is “fixed” if there is a permanent connection to a specific part of the earth’s surface. It is not necessary to be firmly anchored to the ground; it is sufficient if the business facility is located at the same place (e.g. a newspaper stand or market stalls) for at least a certain period of time (e.g. regularly for a few hours).
With regard to the permanent connection to the earth’s surface, it is also necessary for the entrepreneur to have more than temporary power of disposal over the business equipment or facility. Ownership under civil law is not required for the criterion of “power of disposal”. Rather, rent, lease or gratuitous transfer are sufficient, for example, provided that the entrepreneur is granted a legal position that cannot be easily withdrawn without his involvement. Mere shared use is therefore not sufficient to establish a permanent establishment.

2. Individual cases of § 12 sentence 2 AO

§ 12 sentence 2 AO contains examples of which facilities are considered permanent establishments. This includes, in particular, the management permanent establishment. If the management of a foreign company is carried out from Germany, this regularly constitutes a permanent establishment in Germany. Vice versa, this applies to outbound cases.
Warehouses, branch offices or workshops can also constitute a permanent establishment in accordance with the standard examples in § 12 sentence 2 AO.

3. Law of agreement

In cross-border situations, so-called double taxation agreements (DTAs) often apply, which take precedence over national law. Double taxation agreements generally contain an independent definition of a permanent establishment. This differs from the national definition of a permanent establishment in accordance with § 12 AO and must therefore be assessed independently. According to Art. 5 para. 1 OECD-MA, a permanent establishment is a fixed place of business through which the business activities of an enterprise are wholly or partly carried on. Art. 5 para. 2 OECD-MA contains standard examples of a permanent establishment (e.g. management establishment, branch office, branch).

III. Remote working as a permanent establishment

In order to establish the existence of a permanent business establishment, the existence of a fixed place of business is a prerequisite under both treaty law and national law. These terms are largely to be interpreted identically.
An employee’s home constitutes such a fixed place of business. It is irrelevant that the workplace rotates within the home (e.g. first working in the office room, then in the living room).
However, the criterion of “power of disposal (Verfügungsmacht)” is questionable.

1. DBA – Convention law

Under convention law, the employer’s power of disposal over the employee’s private premises is generally denied (according to the OECD model commentary). Other rules should only apply if

• the remote working is permanently used for the performance of the entrepreneur’s business activities and
• the employer requires the employee to use the premises for the performance of the company’s business activities in accordance with the actual circumstances.

Accordingly, a remote working permanent establishment only exists if the employee is de facto forced to work remotely as no other workplace is available. However, under tax treaty law, the literature sometimes already assumes a remote working permanent establishment if the activity is carried out permanently in the home office (see Peter/Hierl, DStR 2024, 1394 (1396)).

2. National law

According to the prevailing literature and the established case law of the BFH, remote working does not regularly lead to a permanent establishment. The reason for this is that the employer lacks the power of disposal.
The BMF has now also taken a similar position in its letter dated 5 February 2024, meaning that the tax authorities do not “generally” want to see a permanent establishment in the case of remote working. This applies even if the employer assumes the costs associated with remote working. Furthermore, according to the BMF, it is irrelevant whether the employee has another workplace available or not. A permanent establishment should not even exist if the employer as tenant concludes a rental agreement with the employee as landlord for the premises in which the remote working is carried out; however, this does not apply if the employer is entitled to use the premises for other purposes. Overall, the BMF therefore takes a very generous, namely restrictive, view with regard to the existence of a permanent establishment in the case of remote working. The reason given by the tax authorities is the employer’s lack of power of disposal over the employee’s remote working premises.

IV. Conclusion

In the opinion of the tax authorities, remote working does not regularly lead to a permanent establishment of the employer. As a result, in the case of inbound cases, Germany regularly does not exercise a (national) right of taxation. In the case of outbound cases, the tax authorities also do not assume a foreign permanent establishment and therefore also tax the income resulting from remote working in accordance with the global income principle – unless a DTA prevents this.
Despite the BMF’s position on remote working as a permanent establishment, a permanent establishment cannot be ruled out from the outset in all cases, as the tax authorities only “generally” do not want to assume a permanent establishment. In order to avoid tax risks and also with regard to tax compliance, it should therefore be carefully examined – initially using the criteria specified in the BMF letter – whether the remote working activity constitutes a permanent establishment.