As an international company, you quickly reach the point where you, abroad, constitute a taxable business establishment in Germany. In this regard, it is important to understand that this business establishment does not exist firstly through the intention of setting up a business establishment, but rather are justified by actual trade. The questions are then: “When is a tax obligation for foreign companies in Germany constituted?” and: “How can I check whether I am tax liable in Germany?”
Naturally a business establishment abroad is not always desired, since they are linked to bureaucracy and often also to high costs. We therefore also want to go into more comprehensive detail on the tax obligations of foreign companies in Germany.
The guidelines for taxing international companies are found in the bilateral agreements for avoiding double taxation of income and assets. The OECD model agreement forms the framework for the agreement of bilateral double taxation agreements, the main purpose of the model agreement is the as integrated as possible regulating of problems and contract design for the OECD member states. Based on this framework, the particularities from the bilateral agreements must therefore be taken into consideration for each country, which would naturally break up the framework for such an article.
If you consider the issue of tax liability in Germany, you must firstly differentiate between three different types:
- Sales taxable registration/business establishment (not profit taxation)
- Income taxable business establishment (not profit taxation)
- Corporate taxable business establishments (full tax liability with German revenues)
If we are talking about a business establishment abroad, the corporate taxable business establishment (point 3) is usually meant, since only in this case must the profits of the company be taxed according to double taxation agreements in Germany. The corporate taxable business establishment also includes both the other two points, since you must pay both income tax and sales tax in this case.
However, all three variants should be briefly considered and explained:
1. Sales taxable registration/business establishment
Sales taxable registration is necessary in Germany, as soon as sales taxable sales are generated in Germany. This relates primarily to the sale of goods to end consumers (B2C).
If you therefore sell products to private individuals in Germany using your company, the German state would like to take the sales tax. In this case, you must register yourself for sales tax liability as an employer in Germany and account for 19% value added tax on your invoices, which you pay to the German tax office. German input taxes, which are directly connected to these sales, can be of course be independently deducted. In this case, you have, however, no full business establishment in Germany, i.e. you do not have to pay tax on your profits according to DBA in Germany.
How can you avoid sales taxable registration in Germany?
The Mini-One-Stop-Shop special regulation is directed at EU employers, who render telecommunications, radio and television services or services rendered by electronic means to private individuals in another member state of the EU, in which they have neither their registered office of their business activity or sales taxable registration.
Each EU employer must check in their country, whether this method has already been introduced. It has been possible in Germany since 1 January 2015.
The special regulation of the Mini-One-Stop-Shop enables the employers of the member states of the European Union (EU) to declare sales, which fall under this special regulation, in a special tax declaration in the country of the company’s registered office. In this tax declaration, the resulting taxes for all EU sales in total are paid centrally. This regulation, however, only applies to the sales in other member states of the EU, in which the employer does not have sales taxable registration/business establishment.
Use of the Subject-to-Reverse-Charge method
Other services in the B2B area fall under the Subject-to-Reverse-Charge method. This sales taxable regulation determines that not the employer providing the services, but the customer thereof (the receiver of the service) owes the sales tax.
If your customers are thus only German employers and not private individuals, you do not have to register. You prepare the invoice without displaying tax (net) and your business customer is liable to pay the sales tax to the German tax office
Special circumstances: Exceptions of the Subject-to-Reverse-Charge method
In the case of so-called special circumstances, it can happen that a sales tax obligation is present in Germany, although it concerns services in the B2B area.
By way of example, we have listed below some of the special circumstances, checking of the individual matter is, however, always necessary:
- One exemption are property-related events e.g. trade fairs or exhibitions, even when you sell the entrance ticket only to employers.
- Short-term rental of transportation means
- Cultural, artistic, scientific, instructing, sports, entertainment or similar services
2. Income taxable business establishment:
Furthermore, there may be a case for an income taxable business establishment in Germany. This is the case if you, as a foreign employer, maintain a business establishment in Germany according to the AO (tax code) i.e. you work as an employee or permanent representative in Germany and must pay the salary for this person according to German tax and social security law.
A business establishment in the sense of income tax law does not assume a business in the general sense, but rather only the fact that individuals are working in Germany as income tax liable.
This applies in particular for individuals, who work in facilities, which are not recognized according to Art. 5 Section 4 OECD model agreement as corporate taxable business establishments. These include in particular facilities, which are maintained exclusively for storing, exhibiting or delivering goods or products. Furthermore, facilities are hereby meant, which are maintained exclusively for the purpose of purchasing goods or products or procuring information.
In the case of working as a permanent representative in Germany, it must be verified precisely in each case, which power of attorney for which type of businesses has been granted, since through the work of this individual, a business establishment in the sense of corporation tax liability may be justified.
3. Corporate taxable business establishment:
The fascinating question is obviously that of the corporate taxable business establishment, since here the taxation of profits in Germany comes in. There are also of course the income taxable and sales taxable obligations.
How can I check whether I have a corporate taxable business establishment in Germany?
The following points can be looked through in order to obtain a first impression of whether you fulfil the requirements for a corporate taxable business establishment. Of course, in individual cases, the associated comments and the double taxation agreement of the two countries must also be consulted since there are of course always individual cases and exceptions. If you have questions regarding a very specific, individual case, I’m pleased to be the German contact person.
No, you do not have a corporate taxable business establishment if...
- You only purchase in Germany, thus are involved in sourcing.
- You maintain facilities in Germany exclusively for exhibition, storage or shipping of goods.
- If you are only involved in research in Germany, e.g. analyze the German market and thus procure information for your company or come to Germany as the information researcher, provided this is not connected with editorial work.
- If the activities you carry out are only preparatory in nature or ancillary activities.
Yes, you have a corporate taxable business establishment, if…
If you have a “place of management” in Germany, e.g....
- A subsidiary
- A store
- A manufacturing site
- A workshop
- Or if you are involved in the extraction of natural resources (mining, oil, gas extraction)
As soon as you have a fixed establishment (this can also be the home office of an individual employee), you unavoidably also have a corporate taxable business establishment in Germany. This is a permanent fixed establishment, this thus does not refer to traveling sales people.
How can you avoid business establishment in this case?
Of course you can avoid business establishment, by avoiding the points listed under 1 to 5. In most cases, e.g. if this is mining of natural resources, this option is not possible.
If you, however, operate a trading company, it is conceivable that you sell over the internet and thus does not constitute a store in Germany. If you only operate and ship from your storage in Germany, there is only one income taxable business establishment with sales taxable registration, if you sell your goods not only to companies, but also to private end consumers. However here in Germany, no sales contracts can therefore be entered into, thus orders accepted.
If you carry out assemblies and in this regard you stay in one place for longer than 6 months
Example (corporate taxable business establishment is not applicable):
If you build red wooden cottages in Germany as a Swedish construction company and require less than 12 months for the construction of a house, you do not constitute a corporate taxable business establishment in Germany (only an income taxable business establishment and if applicable sales taxable registration is necessary if you are not building for companies, but rather for private developers). Even if you build multiple cottages at different locations in Germany consecutively, the time is not added up, i.e. you can e.g. build for 5 months, ten times consecutively at ten different construction sites for ten different developers in each case.
Continuation of the example (corporate taxable business establishment is applicable):
If you, however, build an entire Swedish housing estate consisting of 10 cottages, this will be considered as one single big project. In this regard, it is insignificant whether the estate had been commissioned by only one developer or whether each individual house in the estate had been commissioned by a different private developer. In this case, you automatically have a business establishment in Germany and must pay tax on your profits according to the double taxation agreement.
How can I avoid business establishment in the case of assemblies?
As you can see from the example, you can avoid a corporate taxable business establishment by not working on a construction site in Germany for longer than 12 months. The individual details of the construction project must, however, always be checked against the guidelines and the legislation in order to avoid undesirable surprises.
If you carry out editorial work in Germany
Editorial work automatically leads to a business establishment. A journalistic foreign correspondent, who comes to Germany to research information, is not automatically tax liable. Rather it is where the focus of the intellectual work is and this is presumably the place where the editorial work takes place. Therefore, the research activity is not to be taxed in Germany, if the intellectual editorial work is carried out abroad. Conversely, this of course also means that you, provided you allow editorial work to be carried out in Germany, have a corporate taxable business establishment in Germany.
How can you avoid a German business establishment in the case of journalistic activities?
Simply carry out the research in Germany and the editorial work in your home country. You will thus avoid having to pay tax on your profits in Germany.
If you have a representative in Germany, who can conclude transactions for you with contractual power of attorney.
At this point, it is irrelevant whether there is also a place of work in the form of a building or whether your representative concludes contracts for you from a desk in his bedroom: as soon as you have a representative, who has a contractual power of attorney from you in the name of the company in order to conclude contracts and exercises this power of attorney in Germany, you have a corporate taxable business establishment in Germany.
How can you avoid business establishment in this case?
Instead of sending your own employee, it makes sense to here think about a self-employed independent agent, who is located in Germany. This agent only negotiates the contract offer, which you conclude yourself as the company and subsequently execute. If you however would like to work with your own employee, this employee must not have a power of attorney in the above-mentioned manner.
There are many different cases, in which it must be decided: business establishment – yes or no? By completing this article, you should already have got a good overview of the different problematic points. It must always be checked in the corresponding individual case whether there is an exception or special regulation in force and what the actual taxes are in the respective relevant double taxation agreement.
I am pleased to help further in this regard, simply get in contact with my office and I will take a look at your individual case. Check out our international partners or our services for further information or call me at +49 (0)203 44 98 999 - 13.
Author: Heinz Potthast
Heinz Potthast ist Steuerberater und Wirtschaftsprüfer mit einem großen Erfahrungsschatz durch seine langjährige Tätigkeit bei namhaften Gesellschaften wie KPMG und PKF. Er ist das Gesicht, das übergeordnete Kontrollgremium und der Leiter unserer Kanzlei. Er betreut jeden unserer Kunden persönlich. Heinz Potthast is tax consultant in Germany with an huge international network to help companies all over the world.