When foreign companies engage in business activities in Germany, it is crucial to understand when these activities constitute a Permanent Establishment (PE) under the applicable Double Taxation Agreements (DTAs). Recognizing the formation of a PE is essential, as it triggers specific tax obligations and compliance requirements.
This article provides an overview of the criteria for establishing a PE in Germany, with examples from various DTAs, and outlines the associated responsibilities for foreign enterprises.
Understanding Permanent Establishment (PE)
A Permanent Establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on. The definition and criteria for a PE are outlined in Article 5 of the OECD Model Tax Convention, which forms the basis for many DTAs.
Key Characteristics of a PE:
- Fixed Place of Business: A specific location with a degree of permanence.
- Business Activities: Conducting core business operations, not merely preparatory or auxiliary activities.
Examples of a PE:
- Place of management
- Branch
- Office
- Factory
- Construction site or assembly project exceeding a certain duration
PE Criteria in Selected DTAs
While the OECD Model provides a general framework, individual DTAs between Germany and other countries may have specific provisions. Below are examples of time thresholds from various DTAs:
- Germany-France DTA: Construction or assembly projects lasting more than 12 months.
- Germany-Ireland DTA: 12-month threshold.
- Germany-Poland DTA: 12-month threshold.
- Germany-United Kingdom DTA: 12-month threshold.
- Germany-Italy DTA: 12-month threshold.
- Germany-Hungary DTA: 12-month threshold.
- Germany-Turkey DTA: 12-month threshold.
- Germany-Czech Republic DTA: 12-month threshold.
- Germany-Romania DTA: 12-month threshold.
- Germany-Spain DTA: 12-month threshold.
For most DTAs, a construction or assembly project exceeding 12 months is deemed a PE, but always confirm specifics in the applicable DTA.
Obligations Arising from Establishing a PE
Once a PE is established in Germany, the foreign company becomes subject to several tax and compliance obligations:
1. Corporate Income Tax: Profits attributable to the PE are subject to corporate income tax under German law (§ 1 KStG – Körperschaftsteuergesetz).
2. Trade Tax: The PE is generally subject to trade tax (§ 2 GewStG – Gewerbesteuergesetz), depending on the nature of the business.
3. VAT Registration: If the company engages in taxable supplies, VAT registration and compliance with reporting obligations are required (§ 13b UStG – Umsatzsteuergesetz).
4. Accounting Records: The PE must maintain proper accounting records to determine taxable profits in Germany.
Wage Tax and Social Security for Employees
Employees working in Germany for a PE trigger specific obligations for the foreign employer:
- Wage Tax (§ 38 EStG): Employers must withhold German wage tax from employees’ salaries from the first day of work in Germany and remit it to the tax authorities.
- Social Security Contributions (§ 4 SGB IV): Employees are subject to German social security laws unless exempt under an international agreement (e.g., with an A1 certificate).
Construction Withholding Tax
Foreign companies providing construction services in Germany are subject to the construction withholding tax (§ 48 EStG). Key aspects include:
- Withholding Rate: 15% of the payment is withheld by the German client unless an exemption certificate (§ 48b EStG) is obtained.
- Exemption Certificate: To avoid withholding, foreign companies must apply for this certificate with proof of tax compliance in Germany.
VAT Considerations
For VAT purposes, foreign companies must comply with German VAT laws:
- Registration: Required for most taxable activities, unless the reverse charge mechanism applies.
- Reverse Charge (§ 13b UStG): For construction services, the German customer often assumes VAT liability.
- Invoicing: Invoices must comply with German VAT requirements, including explicit reference to reverse charge where applicable.
Conclusion
Establishing a Permanent Establishment in Germany under a DTA involves meeting specific time thresholds and triggering obligations such as corporate income tax, trade tax, and VAT registration. Foreign companies must also consider wage tax, social security contributions for employees, and compliance with the construction withholding tax.
At WW+KN, a Baker Tilly Company, we specialize in helping foreign companies navigate these complexities. If you have questions or need support, please contact us at info@wwkn.de. Our team is ready to assist you with professional and tailored advice.
