Foreign companies often carry out projects in Germany, such as installations, technical upgrades, laboratory fit-outs, construction of manufacturing facilities, or the assembly of complex industrial machinery.
Whether working on data center cabling, laboratory installations, plant construction, or specialized machinery setups — companies entering the German market must carefully consider their legal and tax obligations.
At WW+KN, a Baker Tilly Company, we guide international businesses in choosing the right structure for their German operations: operating through a permanent establishment or establishing a subsidiary.
1. Common Types of Installation and Construction Activities
Foreign companies typically undertake:
- Installation of IT infrastructure and data cabling in data centers
- Laboratory and cleanroom equipment setup
- Construction of manufacturing facilities or warehouses
- Assembly and commissioning of industrial machinery
- Technical upgrades and complex facility refurbishments
- Construction and civil engineering projects
Regardless of project type, German law imposes strict compliance requirements.
2. Understanding Contract Structures: Work Contracts and Work Supply Contracts
Foreign companies must correctly structure their German projects legally. Two important types of contracts exist:
- Work Contract (Werkvertrag):
The contractor owes a specific result (a completed installation, a functioning machine, etc.). Payment is due once the agreed result is achieved and accepted. - Work Supply Contract (Werklieferungsvertrag):
This involves the delivery of goods plus installation or assembly. It is primarily about the transfer of goods, with additional services.
The distinction matters because it affects VAT treatment, liability, and compliance with construction and labor laws.
Legal review of contracts is critical.
At WW+KN, we work closely with our legal colleagues at Baker Tilly to ensure that your project contracts are properly structured and compliant with German law.
3. When Does a Permanent Establishment (PE) Arise?
Under most double taxation agreements (DTA), including the OECD Model and the US-Germany treaty, a permanent establishment (Betriebsstätte) is created if:
- A fixed place of business exists in Germany for project activities, or
- Construction, installation, or assembly projects last longer than 6 to 12 months (depending on the DTA)
Consequences of creating a PE include:
- German taxation of profits attributable to the PE
- Requirement for local tax registration and filings
- Increased local compliance obligations
Failing to correctly assess the presence of a PE can lead to significant tax risks and penalties.
4. When Should a Subsidiary Be Established?
For long-term projects or continuous business activities, establishing a German subsidiary (e.g., a GmbH) is often the better option.
Advantages of a subsidiary:
- Separate legal entity: Limiting liability and legal exposure
- Simplified contracting with German customers and authorities
- Improved credibility in the German market
- Easier compliance management (e.g., for VAT and accounting)
WW+KN assists in setting up subsidiaries quickly and efficiently, ensuring full legal and tax compliance.
5. Important Tax Considerations: Construction Tax Withholding and VAT
a) Construction Tax Withholding (Bauabzugsteuer)
Germany imposes a 15% construction tax withholding (Bauabzugsteuer) on certain payments related to construction services.
Foreign companies may be affected if they perform construction or installation services in Germany, unless:
- They obtain an exemption certificate (Freistellungsbescheinigung) from the German tax authorities.
Without the exemption, German clients must withhold 15% of the invoice amount and remit it to the tax office — significantly impacting cash flow.
b) VAT Treatment and Reverse Charge
When providing installation or construction services in Germany, companies must assess:
- If the Reverse Charge Mechanism applies (i.e., the German client accounts for VAT instead of the foreign supplier), or
- If standard VAT registration and invoicing obligations apply.
Incorrect VAT treatment can lead to penalties, input VAT loss, and reputational risks.
WW+KN ensures correct VAT handling, including guidance on registration and invoicing.
6. How WW+KN Can Support Your Projects in Germany
At WW+KN, a Baker Tilly Company, we offer full-service support for foreign companies executing projects in Germany:
- Analysis of whether a permanent establishment will arise
- Formation of subsidiaries (GmbH) if required
- Support with construction tax withholding obligations (Bauabzugsteuer)
- VAT registration and compliance (including Reverse Charge assessments)
- Accounting and financial reporting in German and English
- Drafting and reviewing work contracts in cooperation with our Baker Tilly legal colleagues (contract law, construction law, employment law)
We act as your single point of contact for accounting, tax, and legal matters — ensuring your project runs efficiently and compliantly.
Get in Touch
WW+KN, a Baker Tilly Company, is your reliable partner for installation, construction, and project activities in Germany.
We help international businesses manage legal, tax, and operational requirements for successful project execution.
For individual advice and service offers, please contact us at info@wwkn.de.
