Is Working from Home Considered a Permanent Establishment?

The Taxable Permanent Establishment

Assessing issues related to working from home first requires an understanding of the general requirements for a permanent establishment. In international cases, the assessment is conducted in two steps:

First, it must be determined whether, under domestic law, a permanent establishment exists within the meaning of Section 12 of the German Fiscal Code (AO).

According to Section 12, sentence 1, of the German Fiscal Code (AO), a permanent establishment is any fixed business facility or installation that serves the activities of an enterprise. A business facility or installation is required that has a fixed relationship, both in terms of location and time, to the earth’s surface, that directly serves the enterprise’s activities, and that the enterprise can use on a more than temporary basis. Each of the aforementioned criteria must be met, although they may be present to varying degrees. Whether a permanent establishment is established under national law must ultimately be determined based on a comprehensive assessment of the individual case.

The second step is to determine whether a double taxation treaty (DTT for short) limits German taxing rights. This may require an examination of whether a permanent establishment exists under the treaty. If a permanent establishment under the treaty exists in a contracting state, that state may generally tax the profits attributable to the permanent establishment.

The BMF letter dated June 18, 2026, discusses the concept of a permanent establishment under tax treaties, using Article 5 of the 2025 OECD Model Tax Convention as an example. According to Article 5(1) of the OECD Model Tax Convention, a permanent establishment is a fixed place of business through which the business activities of an enterprise are wholly or partly carried on. In addition, the negative list in Article 5(4) of the OECD Model Tax Convention stipulates that certain facilities and activities—such as exclusively preparatory or auxiliary activities—do not qualify as permanent establishments, even if the other requirements under the treaty are met.

According to the most recent letter from the Federal Ministry of Finance (BMF), the tax authorities generally assume that the domestic definition of a permanent establishment and the definition under tax treaties are largely consistent. However, the negative list in Article 5(4) of the OECD Model Tax Convention applies exclusively at the treaty level, as the BMF letter clarifies.

If a permanent establishment exists under domestic law but not under the relevant double taxation treaty, the right to tax that exists under domestic law is limited by the double taxation treaty. Conversely, a double taxation treaty cannot establish a right to tax that does not exist under domestic law.

The Home Office as a Permanent Establishment

The Federal Ministry of Finance (BMF) has issued a clear statement regarding working from home: The work performed by an employee without a managerial role in his or her home office generally does not constitute a permanent establishment of the employer within the meaning of Section 12, sentence 1, of the German Fiscal Code (AO) nor a permanent establishment within the meaning of Article 5, paragraphs 1 and 4, of the OECD Model Tax Convention. This assessment under domestic law and treaty law is consistent with the position already set forth in the Application Decree to the German Fiscal Code (AEAO) regarding Section 12 of the German Fiscal Code (AO).

Under national law, the existence of a permanent establishment is generally ruled out because the employer does not have sufficient control over the employee’s home premises. According to the BMF letter, neither the employer’s coverage of the costs or provision of equipment for the home office nor a lease agreement in which the employee acts as the landlord and the employer as the tenant is generally sufficient for this purpose. This also applies if the employee has no other workplace available besides the home office.

However, according to the Federal Ministry of Finance (BMF), sufficient authority to dispose of the property may exist in exceptional cases if the employer is in fact entitled to use the rented premises for other purposes. As examples, the BMF letter cites the right to assign other employees to the premises or a general right to enter the premises outside of occupational safety inspections.

Another exception may apply to individuals in management positions. Their work from home may constitute a management permanent establishment even if the company has no authority over the home workspace. Until now, there has been some uncertainty regarding which activities qualify as management functions. The BMF letter provides some clarity in this regard by explicitly referring to the concept of “management” under Section 10 of the German Fiscal Code (AO). According to this, relevant activities are those that can be attributed to the actual management of the company. The decisive factor is the location where management activities, in the sense of a company’s day-to-day operations, are actually carried out.

Finally, with regard to the assessment of work-from-home activities at the treaty level, the BMF letter refers to the criteria set forth in the 2025 OECD Model Commentary on Article 5 of the OECD Model Tax Convention (specifically paragraphs 44.1 through 44.21). According to these criteria, the use of a home office generally does not constitute a permanent establishment attributable to the employer if the employee spends less than 50% of their total working time there. However, even if this threshold is exceeded, a business-related reason for working at that location is also required—such as proximity to customers or suppliers. If, on the other hand, the work-from-home arrangement is based exclusively on the employee’s personal reasons, it generally does not constitute a permanent establishment under the treaty.

According to the BMF letter, the 50% threshold in question also applies to employees in management positions. However, if a permanent establishment for management is deemed to exist under national law, but the work performed from home remains below the 50% threshold, the tax authorities would therefore consider that no permanent establishment exists at the contractual level.

It should also be noted that the BMF letter classifies the criteria of the 2025 OECD Model Commentary merely as a clarification. In the view of the tax authorities, they can therefore also be used to interpret older tax treaties.

Conclusion

From a practical standpoint, the clarifications provided in the BMF letter regarding the home office as a permanent establishment are most welcome. They confirm the prevailing view that work performed from home by an employee without a managerial role generally does not constitute a permanent establishment. Furthermore, the letter indicates that the tax authorities fully apply the criteria set forth in the 2025 OECD Model Commentary on home office permanent establishments. The clearly defined requirements therein—the 50% threshold and the requirement for a business-related reason—provide legal certainty in this regard.

Against this backdrop, the question arises as to whether companies will be able to employ highly qualified workers remotely in the future, regardless of their country of residence, since their qualifications alone are unlikely to constitute a business reason for working at that particular location—provided that the relevant contracting state applies the criteria accordingly.

For employees in management positions, the 50% threshold at the agreement level also prevents the creation of so-called “micro-establishments,” which entail a significant administrative burden without generating a corresponding amount of tax revenue.

Nevertheless, cross-border work-from-home situations must continue to be carefully reviewed on a case-by-case basis in order to identify and avoid tax risks at an early stage.