The German Federal Ministry of Finance (BMF) has issued important administrative guidance on the definition of a permanent establishment and the circumstances under which a permanent establishment is created under both domestic and international tax law. The guidance addresses, in particular, the challenges arising from remote work arrangements, digital service business models, and modern workplace structures.
New BMF guidance on permanent establishments
The Ministry of Finance guidance dated June 18, 2026, systematically consolidates the current administrative principles governing the definition of a permanent establishment and the creation of a permanent establishment. It replaces, to that extent, the original version of the previous Ministry of Finance guidance dated December 24, 1999. Its primary focus is on tax matters with an international dimension, although the principles apply equally to both unlimited and limited taxpayers under German tax law.
Working from home does not create a permanent establishment
One of the most significant updates concerns the treatment of remote work arrangements in Germany, which are addressed comprehensively in the BMF guidance for the first time. The guidance makes it clear that an employee working from a home office will generally not create a permanent establishment of the employer under Section 12, sentence 1 of the German Fiscal Code (AO) or under Article 5(1) and (4) of the OECD Model Tax Convention. This is because the employer typically does not have the required right of disposal over the employee’s home premises.
Permanent establishment criteria must always be considered together
Another important clarification concerns the interaction between the various legal criteria that determine whether a permanent establishment exists. The guidance expressly states that these criteria must not be assessed in isolation but always in conjunction with one another as part of an overall evaluation of the specific facts and circumstances of each case. This applies in particular to the geographic and temporal permanence of the place of business or facility, as well as the enterprise’s right of disposal over it.
BMF guidance clarifies the criteria for a permanent establishment
Compared with the previous administrative guidance, the new circular contains significant clarifications and additions. While the basic structure of the domestic permanent establishment definition under Section 12 AO remains unchanged, the individual legal criteria are now explained in greater detail and aligned with current case law.
Particular emphasis is placed on the explicit incorporation of the German Federal Fiscal Court’s decisions issued in December 2024, which provided important guidance on the interaction between the various legal criteria for determining a permanent establishment. These court rulings have now been formally incorporated into the administrative guidance and are presented in a systematic manner.
New guidance makes the rules easier to apply in practice
In the area of tax treaties, the BMF guidance generally follows the provisions of the 2025 OECD Model Tax Convention and the accompanying OECD Commentary. At the same time, it expressly takes into account Germany’s reservations and observations included in the OECD Commentary, particularly with respect to the so-called “painter example” and construction or installation supervisory activities.
A key innovation compared with the previous guidance is the comprehensive discussion of individual fact patterns that frequently arise in practice. These include, in particular, activities carried out on third-party premises, service and management companies, market stalls, children’s bedrooms, home offices, influencers, ships, employee secondments, and the provision of operational equipment. Each of these scenarios is accompanied by detailed examples and legal analysis, making the guidance significantly easier to apply in practice.
Distinguishing between a permanent representative and an agency permanent establishment
The guidance also clarifies the distinction between the domestic law concept of a permanent representative under Section 13 of the German Fiscal Code and the treaty-based agency permanent establishment under Article 5(5) and (6) of the OECD Model Tax Convention. These concepts are not identical and must be analyzed independently of one another.
Under Section 13 of the German Fiscal Code, a permanent representative is a person who carries on the business of an enterprise on a sustained basis while acting under the enterprise’s instructions. Unlike a permanent establishment, the existence of a permanent representative does not require a fixed place of business. A permanent representative may be an individual, a legal entity, or a partnership. However, the owner of an enterprise cannot simultaneously qualify as the permanent representative of that same enterprise.
Agency permanent establishments and service permanent establishments
An agency permanent establishment under Article 5(5) of the OECD Model Tax Convention is a separate concept that applies independently of the requirements set out in Article 5(1) and (2) of the OECD Model Tax Convention. Such an agency permanent establishment exists where a person habitually concludes contracts on behalf of an enterprise in a contracting state or habitually plays the principal role leading to the conclusion of contracts. Whether that person has formal authority to conclude contracts is not decisive.
With respect to service or management companies, the guidance clarifies that, under certain circumstances, a taxpayer may create a permanent establishment by engaging such a company and carrying out business activities at its premises. This requires that the taxpayer’s lack of a right of disposal over the premises be effectively replaced by the taxpayer’s own business activities conducted there. Merely outsourcing functions to a service or management company, without simultaneously carrying on the taxpayer’s own business activities at the third-party premises, does not give rise to a permanent establishment.
Impact on remote work and digital service business models
The guidance on remote work arrangements is among the most significant practical developments introduced by the new circular. As a general rule, an employee working from a home office does not create a permanent establishment of the employer under either Section 12, sentence 1 of the German Fiscal Code or Article 5(1) and (4) of the OECD Model Tax Convention. This remains true even if the employer reimburses the employee’s home office expenses or pays for the home office equipment.
However, a place of management permanent establishment may be created if management functions are performed from a home office. Accordingly, the place of effective management within the meaning of Section 10 AO may also be located in the private residence of a managing director or other executive. The same principle applies under applicable tax treaties if management decisions are made from a home office.
Whether a person working from a home office creates an agency permanent establishment under a tax treaty is determined exclusively by the requirements of Article 5(5) and (6) of the OECD Model Tax Convention. If those requirements are met by a person working from a home office in another contracting state, the enterprise will be treated as having a treaty-based permanent establishment in that other contracting state with respect to all activities carried out there by that person on behalf of the enterprise.
For purposes of interpreting the treaty-based permanent establishment concept in the context of home office arrangements, paragraphs 44.1 through 44.21 of the OECD Commentary on Article 5 of the OECD Model Tax Convention are controlling. According to the Commentary, an employee who uses a home office for less than 50 percent of their total working time for a particular employer will generally not create a treaty-based permanent establishment attributable to that employer.
Revised administrative guidance on the permanent establishment concept
The BMF guidance dated June 18, 2026, represents a comprehensive and practice-oriented revision of the administrative principles governing the permanent establishment concept. One of its greatest strengths is its detailed discussion of individual fact patterns that are becoming increasingly important in practice. These include, in particular, remote work arrangements, digital business models, influencer activities, and business operations carried out on third-party premises or through service companies.
Comprehensive legal advice on permanent establishments in Germany and abroad
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BMF guidance dated June 18, 2026
