A permanent establishment for construction and assembly activities in Germany is typically defined under Article 5 of applicable Double Taxation Agreements (DTA) and the German tax code (§ 12 AO – Abgabenordnung).
Key points include:
- A construction or assembly project constitutes a permanent establishment if it exceeds a certain duration.
The time threshold varies based on the applicable DTA:
6 months, 9 months, or 12 months depending on the agreement between Germany and the foreign company’s home country.
- The duration includes all work performed on the project by the foreign company or its subcontractors in Germany.
Consequences of Establishing a Permanent Establishment:
- The permanent establishment becomes subject to corporate income tax (§ 1 KStG – Körperschaftsteuergesetz) and trade tax (§ 2 GewStG – Gewerbesteuergesetz) in Germany.
- Profits attributable to the permanent establishment must be calculated separately and taxed accordingly.
When Are Employees Subject to Wage Tax and Social Security Contributions?
For employees working on construction or assembly projects in Germany, wage tax and social security obligations arise when certain conditions are met:
1. Wage Tax:
- Employees become subject to German wage tax (§ 38 EStG – Einkommensteuergesetz) from their first day of work in Germany.
- The employer must register with German tax authorities and withhold wage tax on behalf of employees, remitting it to the authorities.
2. Social Security Contributions:
- Employees are generally subject to German social security contributions (§ 4 SGB IV – Sozialgesetzbuch IV) if their stay in Germany exceeds 183 days within a 12-month period or if they are not covered by their home country’s social security system under a bilateral agreement (e.g., an A1 certificate).
Obtaining a Construction Withholding Tax Certificate
Foreign companies performing construction services in Germany are subject to the construction withholding tax (§ 48 EStG). This tax requires the German client to withhold 15% of the payment and remit it to the German tax office unless the foreign company obtains an exemption certificate (§ 48b EStG).
- Exemption Certificate:
A certificate of exemption ensures that no withholding tax is deducted. To apply, the foreign company must:- Provide proof of tax registration in Germany.
- Demonstrate compliance with German tax obligations.
- Without an Exemption Certificate:
- The withholding tax is deducted and remitted to the tax authorities. While this can be offset against the company’s final tax liability, it may result in cash flow challenges until the tax return is filed.
VAT Implications for Construction and Assembly Activities
Foreign companies must also consider their VAT obligations in Germany (§ 13b UStG – Umsatzsteuergesetz):
- Reverse Charge Mechanism:
In many cases, the German customer is required to account for VAT under the reverse charge mechanism. This applies to foreign companies providing construction services in Germany.
- VAT Registration:
If the foreign company engages in activities that do not fall under the reverse charge mechanism, it may need to register for German VAT. This includes supplying goods or services directly to private individuals or non-business customers.
- Invoices:
Invoices must comply with German VAT regulations, including details such as the recipient’s VAT ID and a clear indication of whether reverse charge applies.
Calculating the Time Threshold for a Permanent Establishment
The determination of whether a permanent establishment exists depends on the duration of the project. Key considerations include:
1. Start of the Timeframe:
The clock starts when construction or assembly activities commence on-site, including preparatory work.
2. Interruptions:
Temporary interruptions (e.g., due to weather or material delays) are typically included in the calculation unless explicitly excluded under the applicable DTA.
3. Thresholds:
Depending on the DTA, permanent establishment status arises after:
- 6 months, common in treaties with Eastern European countries.
- 9 months, applicable to certain other countries.
- 12 months, typical in treaties with the United States and some Western European nations.
4. Aggregation of Projects:
Separate but related projects at the same site may be aggregated to determine whether the threshold has been exceeded.
Key Compliance Steps for Foreign Companies
To ensure compliance with German regulations for construction and assembly activities, foreign companies should:
- Register with the Tax Authorities:
Obtain a tax number for corporate tax, trade tax, and VAT.
- Apply for a Withholding Tax Exemption Certificate:
Avoid unnecessary deductions from payments.
- Ensure Proper Wage Tax and Social Security Compliance:
Register employees and withhold the appropriate taxes and contributions.
- Track Project Timelines Accurately:
Monitor the duration of activities to determine if a permanent establishment is triggered.
How WW+KN Can Support You
At WW+KN, a Baker Tilly Company based in Germany, we specialize in helping foreign companies navigate the complexities of tax compliance for construction and assembly activities. Our experts can assist you with:
- Assessing whether your activities constitute a permanent establishment under German law.
- Applying for withholding tax exemption certificates.
- Managing wage tax and social security registrations for employees.
- Ensuring compliance with VAT obligations.
If you have questions or require assistance, please contact us at info@wwkn.de. Our team is ready to help you successfully manage your projects in Germany.
