Draft of a BMF letter on the concept of a permanent establishment and its justification in domestic and international tax law
The Federal Ministry of Finance has presented a comprehensive draft on the principles governing the definition of a permanent establishment under domestic and international tax law. This document largely replaces the previous administrative interpretation and closely aligns with current case law of the Federal Fiscal Court (BFH) and the OECD Model Tax Convention 2025.
The draft legislation is to be applied to all open cases after its publication in the Federal Tax Gazette. This means it effectively has retroactive effect and is relevant for existing structures as well as new investments and projects.
Below we present the essential content, changes and practical implications for companies with cross-border activities.
1. What is the draft about?
In essence, the Federal Ministry of Finance specifies,
- when a permanent establishment exists according to § 12 AO,
- how the domestic definition of a permanent establishment relates to the definition under Article 5 of the OECD Model Tax Convention,
- how construction and assembly, permanent representatives, home office cases and typical practical examples (IT consulting, service companies, personnel placement, ships, influencers) can be classified.
The draft explicitly applies to both taxpayers with unlimited and limited tax liability and focuses on matters with a foreign connection (inbound and outbound).
2. Key elements of the domestic definition of a permanent establishment
According to Section 12 Sentence 1 of the German Fiscal Code (AO), a permanent establishment exists if the following conditions are met in combination:
- Business establishment or facility
Any physical object or a group of such objects that can form the basis of an entrepreneurial activity (e.g. office, workshop, warehouse, machines, vending machines, wind turbines, pipelines – in individual cases even an office corner or a laptop). - Fixed relationship to the Earth's surface
It does not require a fixed structural connection, but a local connection to a specific location, even for mobile equipment with regular, prolonged use in the same place. - Certain duration (temporal stability)
The standard period is usually six months.
– Either actual use for more than six months, even if originally planned for a shorter period.
– Or planned use of at least six months from the outset, even if it is actually shorter. - Direct service to the company's activities
The institution must engage in or promote its own entrepreneurial activity with a local connection. Mere asset utilization (simply renting out the property) is insufficient. - Not just temporary power of disposal
The company needs an independent right of use that cannot be arbitrarily revoked. This right can also be established orally or implicitly; exclusive use is not required.
It's important Overall assessmentThe characteristics interact; a particularly strong local or temporal connection can partially compensate for deficits in other characteristics.
3. Definition of permanent establishment under treaty law and OECD reference
The draft confirms that the concept of a permanent establishment under Article 5(1) of the OECD Model Tax Convention is, in principle, consistent with Section 12 of the German Fiscal Code (AO). Differences arise in particular:
- during activities preparatory and auxiliary activities (Article 5, paragraph 4 of the OECD Model Tax Convention), which may lead to a negative fiction under the treaty law,
- In the case of construction and assembly: six months domestically (§ 12 sentence 2 no. 8 AO), typically twelve months under treaty law (Art. 5 para. 3 OECD MA),
- in the case of the requirement of actual business activity through a fixed establishment (contract law) as opposed to mere operational readiness (domestic law).
The draft explicitly addresses the OECD Model Commentary (including the rejection of the so-called "painter example" from a German perspective) and discloses Germany's reservations. For companies, this means that other countries may assess the same situation differently – with a corresponding risk of double taxation.
4. Particularly relevant individual cases
The draft contains numerous examples. The following scenarios are particularly relevant for internationally active medium-sized companies:
Operating on the premises of customers or third parties
- Pure performance on the object (e.g. a cleaning company that exclusively cleans the customer's premises) does not, in principle, constitute a permanent establishment at the service provider's premises from a German perspective.
- IT consultant example: If consultants from a foreign company work almost daily in the offices of a domestic company for over twelve months and have a permanent workplace available to them there (including desk sharing), a domestic permanent establishment may be created for the foreign company.
Service or management companies
- A permanent establishment of the client may arise in the premises of the service provider if the client carries out its own entrepreneurial activities there with the help of the material and personnel organization of the service provider (e.g. identity of the management bodies, permanent operational control on site).
- Simply outsourcing functions without the client's own activity on site is not sufficient.
Home Office
- The home office arrangement of employees is generally justified no The employer's place of business, even if costs are covered or a lease agreement exists. The employer typically lacks the power of disposal.
- Unlike in Management functionsIf day-to-day management is carried out from a home office, a permanent establishment may exist there – both nationally and under treaty law.
- For permanent establishments under tax treaties operating from home, the tax authorities follow the OECD guidelines; subordinate use of home office (less than approximately 50 percent of working time) should generally not constitute a permanent establishment.
Construction and assembly projects
- Domestically, a construction or assembly site is established if it lasts for more than six months, including periods spent by subcontractors.
- Under treaty law, an economic connection and the twelve-month limit (or differing double taxation agreement regulations) are also relevant.
Staffing and operating equipment
- The mere rental of facilities or land typically does not constitute a permanent establishment at the landlord's premises.
- However, if the lessor takes over the ongoing operation with his own staff (e.g. container terminal, conveyor systems), he can maintain his own operating facility in the host country.
5. What changes compared to the previous administrative approach?
Once finalized, the BMF (Federal Ministry of Finance) letter will largely supersede the previously applicable BMF letter from 1999 (with subsequent amendments). Key changes include:
- Implementation of current Federal Fiscal Court (BFH) decisions by the end of 2024,
- stronger emphasis on the terms rooting (spatially and temporally) and Power of disposal,
- A clearer distinction between domestic law and treaty law,
- systematic integration of the OECD anti-fragmentation clause to prevent artificial splitting of functions,
- Update of the administrative view on modern structures: home office, influencers, offshore energy plants, complex service and management structures.
The application of this rule "in all open cases" necessitates adjustments not only for future structures, but also for existing ones.
6. Tax implications for internationally active medium-sized companies
For companies with international operations, the following risk areas are particularly relevant:
- Inbound structure:
Foreign companies with permanent staff in Germany (consulting, implementation projects, service, construction and assembly) can more easily establish a domestic permanent establishment than before – with consequences for corporate income tax, trade tax and wage tax. - Outbound structure:
German companies that send employees abroad for extended periods, utilize home office arrangements, or establish service centers there are increasingly at risk of creating foreign permanent establishments. This shifts taxing rights and necessitates a precise allocation of profits according to the arm's length principle. - Transfer prices and permanent establishment profits:
Where a permanent establishment exists (nationally or under a tax treaty), the provisions of the German Foreign Tax Act and the Permanent Establishment Profit Allocation Ordinance apply. The draft legislation establishes the legal framework within which transfer prices and functional allocations must be documented and defended.
7. Recommendations for action and timeline
Even though it is still a draft, it is expected that the tax authorities will already use the principles laid down therein as a benchmark. After publication in the Federal Tax Gazette, they will apply to all open assessment periods.
Companies should therefore:
- Update site risk analysis
- Long-term projects at home and abroad (construction, assembly, service, implementation)
- Deployments of employees in the premises of customers or service providers
- Home office for managers abroad
- Structures with service or management companies
- Review contracts and processes
- Service, consulting and management contracts
- Staffing models and management contracts
- Regulations regarding desk sharing, office use abroad, and home office policies
- Adjust transfer pricing and documentation concept
- Alignment of functional and risk allocation with the new definition of business premises
- Ensure consistency between the allocation of profits to permanent establishments, transfer prices, and actual business operations.
We would be happy to support you in systematically analyzing your existing structures in light of the new BMF draft, identifying permanent establishment risks, and ensuring your tax and transfer pricing compliance is legally sound.
