German tax elements of cross-border distant working

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As a result of the COVID-19 pandemic, remote working became a necessity. Despite the easing of lockdowns, the trend is likely to stay, particularly with “workations” being actively promoted by the travel industry, but there are considerable tax consequences for international employers.


A fixed place of business (PE) or an agent who both has and exercises authority to conclude contracts on behalf of the business (PR).

Note that some tax treaties have a broader definition of the provision of services, and some jurisdictions have introduced temporary changes to law or guidance during the pandemic to accommodate individuals working remotely

Each tax jurisdiction has its own rules and tax consequences covering an employer’s obligation to withhold payroll taxes, and the risk of creating an additional tax nexus in another jurisdiction by creating a permanent establishment (PE) or permanent representative (PR) in that jurisdiction. There is also the added challenge of how these jurisdiction-specific rules interact with each other. Employers that are tax resident in one jurisdiction and employ individuals who choose to work remotely in another jurisdiction (inbound employer), and vice versa (outbound employer), must therefore be alert to the potential risks of remote working. The situation in Germany provides a snapshot of the complexity this new working order creates for international businesses.

A workplace in an employee’s home generally does not constitute a permanent establishment.


By allowing remote working, inbound or outbound employers may unintentionally create a PE or PR in Germany or abroad. A PE/PR may result in the employer triggering a limited tax liability in other states under their national tax laws, which may in turn lead to obligations, e.g., registration, tax filing, and allocation of profits; possibly sanctions in the event of non-compliance; and double taxation risks. It also triggers certain obligations, such as keeping records and documentation for transfer pricing, plus the PE is obliged to withhold employees’ payroll taxes under certain circumstances.

At the same time, inbound or outbound employers may face an obligation to withhold payroll taxes in Germany or abroad. This may require the implementation of additional internal processes, such as determination of the days the employee worked abroad and/or other obligations, such as registering, filing, and paying payroll taxes or other taxes in the states concerned. As a result, employees may need to undertake administrative efforts to mitigate double taxation risks.

Inbound and outbound employers may also need to check and monitor changes in the employee’s social security status, which may involve complex procedures with the respective social security agencies.


Under German tax law, a PE is defined as

  • A fixed place of business (established at a distinct location with a certain degree of permanence (at least six months))
  • Over which the taxpaying enterprise has power of disposal (exclusive and independent entitlement to access premises)
  • And is where the taxpaying enterprise performs business activities.

In terms of a workplace in an employee’s home located in Germany, the employer will generally not have power of disposal as it does not have full access to the employee’s premises. A workplace in an employee’s home therefore generally does not constitute a PE, even if the employee works there almost exclusively.

If, however, the employee lives in an apartment owned by the employer, or the employee rents the premises in his own name specifically for the purpose of working from that location for the employer, the premises may be considered a PE. For non-German resident companies, this should usually trigger the obligation to withhold payroll taxes in Germany. It is therefore crucial for companies that are tax resident outside Germany to check whether or not remote work undertaken outside the companies’ premises, e.g., in an employee’s home or hotel located in Germany, may create a PE in Germany

With regard to any potential limited corporate income tax and trade tax liability in Germany on business income deriving from a PE, under German tax law the rules under an applicable double tax treaty between Germany and the jurisdiction where the employer is tax resident needs to be taken into account.

PE Under German Double Tax Treaties

If a PE is assumed under national tax law, a potential double taxation situation may be resolved by a double tax treaty between the states concerned, provided both states conclude that a PE has been created.

Most German double tax treaties follow the definition of a PE in the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention 2017 (OECD-MA 2017), according to which a PE is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried out.

In terms of carrying on business activities at an employee’s home, the commentary on Article 5 of the OECD-MA 2017 points out that, in many cases these will be so intermittent or incidental that the home will not be a location at the disposal of the enterprise, and thus will not create a PE. If, however, a home office is used on a continuous basis for carrying on business activities for an enterprise, and it is clear from the facts and circumstances that the enterprise has required the individual to use that location to carry on its business, e.g., by not providing an office to the employee in circumstances where the nature of the employment clearly requires an office, the home office may be considered to be at the disposal of the enterprise, and thus creates a PE.

To mitigate the risk of creating a PE during the COVID-19 pandemic, the OECD published a non-binding recommendation, according to which temporary remote work necessary due to the pandemic should not create a (new) PE under treaty law as “the degree of permanence of the activity or the power of disposition of the enterprise required for the assumption of a PE is lacking”. This recommendation was implemented in the bilateral consultation agreements between Germany and Austria, and between Germany and Switzerland.

It is likely that these agreements will be repealed once the pandemic is over, so an internationally coordinated approach reflecting the “new work era”, supported and promoted by the OECD, is now necessary. It is to be hoped that this approach will provide employers with a defined set of clear and comprehensible criteria to enable them to decide in which cases PEs are created by cross-border remote work. In the meantime, however, employers must consider whether or not a PE or PR is created under established national tax law.


Even if the employee’s home does not create a PE, corporate income tax (but not trade tax) liabilities may still be established if the employee working cross-border qualifies as a PR.

If an employee i) acts on behalf of an enterprise; ii) habitually concludes contracts on behalf of that enterprise, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise; and iii) conducts contract negotiations from home (located in a state different to the employer’s tax residence) with third parties until the contract is ready to be signed, that employee is generally considered a PR (under German tax law and German tax treaties) in the state the employee is working from, regardless of whether or not the contract is signed in the employer’s state of residency

Corporate income tax liabilities may be established if the employee working cross-border qualifies as a PR.


When offering employees the opportunity to work remotely cross border, inbound and outbound employers are well advised to allow it only intermittently or incidentally; introduce an approval process; and undertake a comprehensive review of any potential tax consequences triggered by remote working activities in another jurisdiction.

In addition, employers should establish a set of rules to reduce PE/PR risks. These rules must obviously be tailored to each set of circumstances, but should include the following as a minimum:

  • Prevent management functions from being exercised by employees from their home outside the employer’s state of tax residency
  • Undertake detailed reviews of potential tax consequences when core business activities are performed abroad
  • Allow only remote working activities that are of a preparatory or auxiliary nature
  • Prevent employees from concluding contracts and/ or playing a principal role leading to the conclusion of contracts that are routinely concluded without material modification
  • Continue to provide office premises for those employees
  • Limit the employer’s access to the employee’s home outside the employer’s state of tax residency
  • Exclude employers from the employee’s home rental or purchase agreements.