When foreign companies employ workers in Germany, they must be aware of the potential risk of inadvertently creating a permanent establishment (Betriebsstätte) under Germany’s Double Taxation Agreements (DTAs). Establishing a permanent establishment can trigger significant tax obligations and regulatory requirements. This article explores the risks, implications, and strategies to mitigate the establishment of a permanent establishment in Germany, and how WW+KN, a Baker Tilly Company, can assist in managing these complexities.

Understanding Permanent Establishment

A permanent establishment refers to a fixed place of business through which the business of an enterprise is wholly or partly carried on. Common indicators of a permanent establishment include:

1. Physical Presence: Offices, branches, factories, or workshops located in Germany.

2. Duration: A presence in Germany that extends beyond six months is typically considered permanent.

3. Economic Activity: Conducting business operations, generating revenue, or performing services in Germany.

Reference: Article 5 of the OECD Model Tax Convention

Risks of Establishing a Permanent Establishment

When employing workers in Germany, foreign companies face several risks related to the inadvertent creation of a permanent establishment:

1. Tax Obligations

Once a permanent establishment is deemed to exist, the foreign company must pay German corporate tax on the profits attributable to the permanent establishment. This includes filing annual corporate tax returns and paying taxes at the applicable rates.

Reference: § 12 AO (Abgabenordnung – German Fiscal Code)

2. VAT Registration

A permanent establishment requires registration for Value Added Tax (VAT) purposes. This involves collecting and remitting VAT on taxable supplies and filing regular VAT returns.

Reference: UStG (Umsatzsteuergesetz – VAT Act)

3. Social Security Contributions

Employing workers through a permanent establishment necessitates compliance with German social security regulations. This includes making employer contributions to health insurance, pension insurance, unemployment insurance, and long-term care insurance.

Reference: SGB IV (Sozialgesetzbuch IV – Social Code IV)

4. Employment Law Compliance

Establishing a permanent establishment involves adhering to German employment laws, including those related to employment contracts, working hours, termination protections, and employee benefits.

Reference: Arbeitszeitgesetz (ArbZG – Working Time Act), Kündigungsschutzgesetz (KSchG – Protection Against Dismissal Act)

Strategies to Mitigate Permanent Establishment Risks

Foreign companies can employ several strategies to mitigate the risk of inadvertently establishing a permanent establishment in Germany:

1. Clear Contractual Arrangements

Define the scope of work and responsibilities in contracts with German employees to avoid activities that might be considered indicative of a permanent establishment. Ensure that the contracts reflect the limited nature of the engagement.

2. Use of Independent Contractors

Consider employing independent contractors instead of hiring employees directly. Contractors operating independently may not create a permanent establishment, provided they maintain control over their work and are not economically dependent on the foreign company.

3. Temporary Assignments

Limit the duration of assignments in Germany to less than six months whenever possible. Short-term assignments reduce the risk of being considered a permanent establishment.

4. Shared Office Spaces

Avoid establishing a fixed physical office or business location. Using shared office spaces or coworking arrangements can help prevent the formation of a permanent establishment.

5. Consultation with Tax Experts

Engage tax experts to review and structure your operations in Germany. Expert advice can help identify potential risks and implement strategies to avoid creating a permanent establishment.

How WW+KN Can Help

At WW+KN, a Baker Tilly Company, we offer comprehensive support to help foreign companies manage the risks associated with establishing a permanent establishment in Germany. Our services include:

• Risk Assessment: Conducting detailed assessments to identify activities that may trigger the establishment of a permanent establishment.
• Tax Planning and Compliance: Providing strategic advice on structuring operations to minimize tax liabilities and ensure compliance with German tax laws.
• Employment Structuring: Assisting in drafting employment contracts and independent contractor agreements that mitigate the risk of creating a permanent establishment.
• VAT and Social Security Compliance: Ensuring compliance with VAT registration and social security contribution requirements.
• Legal Consultation: Offering expert legal advice on German employment laws and regulatory requirements to ensure full compliance.

Contact Us

Understanding and managing the risks of establishing a permanent establishment in Germany requires expertise and careful planning. To explore how WW+KN can support your company in navigating these challenges effectively, contact us at info@payrollgermany.de. Let us help you ensure compliance with German regulations and optimize your business operations.

By leveraging the expertise of WW+KN and Baker Tilly, you can ensure that your company’s activities in Germany are managed efficiently and compliantly, mitigating the risks of establishing a permanent establishment.