In depth · Advisory
The home office as a permanent establishment: when it becomes a tax liability.
An employee works from home in Germany while the employer is based abroad. The ministry circular of 18 June 2026 deals with this case in full — with a rule that relieves and exceptions that trigger income tax, trade tax and the wage tax deduction.
The rule relieves, the exceptions cost.
An employee works from home in Germany while the employer is based abroad. Under the ministry circular of 18 June 2026 that does not as a rule create a permanent establishment of the employer — neither under § 12 Satz 1 AO nor under Art. 5 of the OECD Model.
The reason is the absence of power of disposal: an employer typically cannot decide over the private rooms of an employee. Neither bearing the costs nor a lease over the domestic rooms changes that (Rz. 140 f.).
The circular replaces the 1999 administrative principles on permanent establishments and applies in all open cases — so to earlier years as well, where the assessment has not yet become final.
What makes it important is less the reassurance than the cases it expressly carves out: the managing director running day-to-day business from Germany, the sales employee soliciting orders, and the extended access to rooms an employer secures by contract.
The essentials at a glance
- As a rule no permanent establishmentThe employer typically lacks power of disposal over the employee's domestic rooms (Rz. 140).
- Three exceptionsManagement from the home office, a dependent agent, and an actually extended right of use each reverse the outcome.
- 50 per cent under treaty lawBelow that share no treaty permanent establishment arises as a rule — not even for management roles (Rz. 145).
Power of disposal: what counts and what does not
Makes no difference
- The employer bears the cost of the home office and its equipment
- A lease over the domestic rooms — the employee lets, the employer rents
- The employee is given no other workplace
- A contractual right of entry to review transactions, books and records — even where widely used in practice
Can change the answer
- The employer is actually entitled to put the rooms to other use
- They may send other employees into the rented rooms
- They have a general right of entry outside checks on workplace safety
- Acts of management of the day-to-day business are taken from the home office
In short: what decides is not who bears the cost but the actual authority over the space — and where there is a management role, it does not come to that question at all.
How it is assessed
- 1Power of disposal over the rooms?Without it there is no fixed place of business under § 12 Satz 1 AO. The use also has to be intended to last at least six months.
- 2A management role in the home office?Where acts of management of the day-to-day business are taken there, a place-of-management permanent establishment arises under § 12 Satz 2 Nr. 1 AO. A fixed place with power of disposal is not required for that.
- 3A dependent agent?Anyone habitually concluding or arranging contracts, or soliciting orders, is a dependent agent under § 13 AO. That creates limited tax liability without any permanent establishment at all.
- 4The treaty cross-checkOnly where domestic law provides a hook does the treaty question arise. There the 50 per cent share and the exceptions in Art. 5(4) of the OECD Model for preparatory and auxiliary activities come into play.
One term, four standards
A permanent establishment means something different in income tax law from what it means in wage tax law, and VAT does not use the term at all. The assessments run independently and can come out differently.
| Area | Standard | Source | Consequence |
|---|---|---|---|
| Income tax | Fixed place of business with power of disposal, intended to last at least six months — or the place of management | § 12 AO, Art. 5 OECD Model | Limited tax liability on the profit attributable to it, § 49 Abs. 1 Nr. 2 Buchst. a EStG |
| Trade tax | A permanent establishment in Germany | § 2 Abs. 1 GewStG | Trade tax liability; apportionment between municipalities under § 28 GewStG |
| Wage tax | A permanent establishment or a dependent agent within the meaning of §§ 8 bis 13 AO | § 38 Abs. 1 Satz 1 Nr. 1 EStG | The foreign employer becomes a domestic employer and has to withhold and remit wage tax |
| VAT | A fixed establishment with sufficient permanence and both human and technical resources | Art. 11 of the VAT Implementing Regulation | A connecting factor of its own — it can exist although there is no permanent establishment for income tax purposes, and the other way round |
What then has to be done
Where a permanent establishment exists, what follows is not a single step but a continuing set of obligations. The first deadline runs before the first return.
| Obligation | Deadline | Source |
|---|---|---|
| Notify the opening of the permanent establishment | within one month of the event | § 138 Abs. 1 and Abs. 4 AO |
| File and remit wage tax | by the tenth day after the end of the filing period | § 41a Abs. 1 EStG |
| Determine the filing period | monthly above 5,000 euros, quarterly above 1,080 euros, otherwise annually — based on the previous year's wage tax | § 41a Abs. 2 EStG |
| Keep a payroll account | for each employee and each calendar year, at the place of the permanent establishment | § 41 Abs. 1 and Abs. 2 EStG |
| Attribute and declare the permanent establishment's profit | continuously, with the annual returns | § 49 EStG, § 2 GewStG |
Working together
What FRADECO takes on.
- AssessingContracts, the profile of the work and the share of time, measured against the ministry circular of 18 June 2026 — with a defensible answer on whether a permanent establishment exists or does not.
- RegisteringNotification of the opening under § 138 AO to the municipality and the Finanzamt, the tax registration, the wage tax returns and the keeping of the payroll accounts.
- DeclaringAttribution of the permanent establishment's profit, the corporate and trade tax returns including the apportionment — plus support through the tax audit and the correspondence with the Finanzamt.
Contracts, the use of space and the shape of the role are of course yours to determine. We tell you in advance which arrangement has which tax consequence — so that the decision is taken on a settled basis.
No transitional rule. The circular applies in all open cases, in so far as statutory provisions do not preclude it (Rz. 165). It therefore covers earlier years as well. Anyone opening a permanent establishment also has to notify it within one month (§ 138 Abs. 1 and Abs. 4 AO).
- Ministry circular of 18 June 2026, „Grundsätze der Verwaltung für den Betriebsstättenbegriff und die -begründung im innerstaatlichen und internationalen Steuerrecht“, GZ IV B 2 - S 1301/01410/007/264 — home office at Rz. 140 to 146, application rules at Rz. 164 f.
- Ministry circular of 24 December 2025, GZ IV B 2 - S 1301/01508/004/038, BStBl 2026 I S. 26 — on the relevance of paras. 44.1 to 44.21 of the OECD Commentary on Art. 5 of the Model
- Repealed in so far as it concerns the concept of a permanent establishment: circular of 24 December 1999, BStBl I 1999 S. 1076, last amended on 22 December 2016, BStBl I 2017 S. 182
- Legislation: § 12 AO · § 13 AO · § 138 AO · § 38 EStG · § 41 EStG · § 41a EStG · § 49 EStG · § 2 GewStG
- Case law: BFH vom 23.05.2002, III R 8/00, BStBl II S. 512 · BFH vom 26.07.2017, III R 4/16, BFH/NV 2018 S. 233 · BFH vom 23.01.1991, I R 22/90, BStBl II S. 554 · BFH vom 18.12.2024, I R 47/21, BStBl II 2026 S. 556
As at 22 August 2026. This page reflects the law as at that date and does not replace a review of the individual case.
Frequently asked
About the home office as a permanent establishment.
We have staff or business activity in Germany — does that create a permanent establishment?
Not by itself. Staff alone are not enough; what matters is whether one of two routes is met.
- Fixed place of business — § 12 Satz 1 AO requires a fixed place of business or installation serving the activity of the enterprise, and a degree of power of disposal over it. Satz 2 names the standard cases: place of management, branch, office, factory and workshop, warehouse, buying or selling outlet — and building sites or installations lasting more than six months.
- Dependent agent — § 13 AO. Anyone habitually concluding or arranging contracts, or soliciting orders, triggers the same consequences with no premises at all.
Two standards run alongside each other here, and they can come out differently. German law (§ 12 AO) is drawn more widely than the double taxation treaty (Art. 5 of the OECD Model). There can therefore be a permanent establishment domestically while the treaty gives Germany no right to tax the profit — which does not help for wage tax, because § 38 EStG attaches to domestic law.
Where a permanent establishment exists, the consequences arrive together: limited corporate tax liability on the profit attributed to it, trade tax, the duty to deduct wage tax and the notification of the opening under § 138 AO. On top comes the attribution of profit between head office and the permanent establishment.
We assess both routes — premises and authorities — and both standards, and record the result so that it stands up to an audit. The detail on the most common situations follows in the questions below.
Does our employee's home office in Germany create a permanent establishment?
As a rule, no. Under Rz. 140 of the ministry circular of 18 June 2026 the employer typically lacks power of disposal over the employee's domestic rooms. Only particular circumstances change that — above all a management role, agency activity or an actually extended right of use.
We assess your case against those features and record the result so that it withstands a tax audit.
Does it change anything if we pay rent or provide the equipment?
No. Neither bearing the cost of the home office and its equipment nor a lease under which the employee lets and the employer rents creates sufficient power of disposal as a rule (Rz. 141).
Nor is it enough that the employee is given no other workplace.
Our managing director works from Germany. Does the reassurance apply to them too?
Not domestically. Where acts of management of the day-to-day business are taken from the home office, a place-of-management permanent establishment can arise there under § 12 Satz 2 Nr. 1 AO. A fixed place with power of disposal is expressly not required for that (Rz. 143).
Under treaty law, however, the 50 per cent share applies to employees exercising management functions as well (Rz. 145).
This is the situation we look at most closely — it is the most common reason a home office turns into a permanent establishment after all.
What happens if there is a permanent establishment?
Three consequences arrive together: limited tax liability on the profit attributed to it (§ 49 Abs. 1 Nr. 2 Buchst. a EStG), trade tax liability (§ 2 Abs. 1 GewStG) and the duty to deduct wage tax — because with a domestic permanent establishment the foreign employer becomes a domestic employer within the meaning of § 38 Abs. 1 Satz 1 Nr. 1 EStG.
On top comes the notification of the opening within one month under § 138 AO.
We take on that whole set of obligations — from the notification through the wage tax returns to the trade tax return and its apportionment.
Can a wage tax obligation arise without a permanent establishment?
Yes. § 38 Abs. 1 Satz 1 Nr. 1 EStG attaches not only to a permanent establishment but also to a dependent agent within the meaning of §§ 8 bis 13 AO.
Anyone habitually concluding or arranging contracts, or soliciting orders, can be a dependent agent under § 13 AO. Both the limited tax liability and the duty to deduct then exist, without premises mattering at all.
That is why we look at the authorities as well, not only the premises — this route is frequently overlooked in practice.
Our staff do not work at home but in the offices of our German company. Is that the same case?
No, that is the neighbouring case and it is assessed differently. The circular deals with it separately under work carried out in third-party premises.
Where core activities of the foreign enterprise are carried out there over a longer period and staff have workplaces permanently available — including rotating ones under desk sharing — power of disposal and hence a permanent establishment can exist. The circular illustrates this with an IT project running over twelve months (Rz. 133).
Does the circular apply to earlier years as well?
Yes. It applies in all open cases, in so far as statutory provisions do not preclude it (Rz. 165). There is no transitional rule.
We therefore review the years still open too, not only the current one. On cross-border structures generally: Advisory & Cross-border.
Goes with this
What hangs on the home office once it counts for tax.
Unsure whether there is a permanent establishment?
We assess the case before the Finanzamt does.
We look at the contracts, the profile of the work and the share of time, measure them against the ministry circular of 18 June 2026 and tell you which registrations and returns follow — or that none do.
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