Germany: The hidden consequences of remote work

With the advance of the digital age and as a result of the Covid pandemic, working remotely has become widespread. But what are the consequences for the company that allows its employees to work remotely? Are there any consequences that are not immediately apparent? Particularly in cross-border situations involving foreign companies, the well-intentioned granting of a remoteworkplace could have far-reaching consequences. Constanze Hoberg, Tax consultant at MSI's multi-disciplinary member firm ADKL in Germany provides further insight.

Permanent establishment - yes or no?  Foreign companies whose employees work exclusively remotely e.g. from their apartment in Germany must first address a fundamental issue: Is a permanent establishment being established? This not only has an impact on the question of whether there is a domestic employer, but also on the company's tax liability.

A permanent establishment is defined as a fixed place of business that serves the activity of the company. In addition, there are other ways in which a permanent establishment can be created. A permanent representative in Germany can lead to a permanent establishment, too, a so-called representative's permanent establishment.

Therefore, it must be examined in detail if there will be a permanent establishment. If there is no permanent establishment, the consequences are manageable. The company acts as a foreign employer and regularly there is no tax liability.

On the other hand, if there is a permanent establishment, the company acts as a domestic employer with all the rights and obligations of a domestic company. In addition, creating a permanent establishment also leads to limited tax liability for the company. Current taxation is associated with obligations and workload. However, the gravest consequences arise when this permanent establishment is given up: Germany has an exit taxation. Among other things, these can lead to taxation in the moment of abandonment of the permanent establishment or in the moment of relocation of individual assets created in Germany, in particular intangible assets such as software. The key question is: What triggers this "hidden"taxation?

The discontinuation of a permanent establishment can be triggered by various circumstances. The problematic cases are these in which the company has no influence on this decision. For example, the termination of employment or the employee moving to another country could trigger such taxation.

These possible consequences should not be disregarded when approving a remote workplace in Germany.

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