The increasing prevalence of hybrid work models means that, more and more frequently, companies are having to reflect on whether working from a home office can create a permanent establishment for tax purposes. In the following section there is a summary of the current regulations as stated in the circular of 2024 by the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) as well as the further developments, in the BMF draft of 13.2.2026, regarding the principles of permanent establishments. Here, the risks involved in international contexts are particularly highlighted. Lastly, practical recommendations on risk management are provided.
1. Starting point - A home workplace generally does not constitute a permanent establishment
According to the BMF circular of 5.2.2024, which is currently still applicable, if an employee works from a home office this would not normally create a permanent establishment within the meaning of Section 12 of the Fiscal Code (Abgabenordnung, AO). The main reason for this is that an employer does not have sufficient control over an employee’s private premises. The right to use the premises remains entirely with the employee. Even if an employer had a significant interest in using the home workplace, or bore the costs of it, this would nevertheless not confer any legally enforceable right on the employer to exercise control over these premises similar to that exercised over their own business premises.
The new BMF draft of 13.2.2026 expressly confirms this starting point. However, the fiscal administration now designates home workplace arrangements as typical specific cases of a permanent establishment and, moreover, it stresses that an assessment needs to be carried out in two stages:
- first of all, it is necessary to clarify whether or not a permanent establishment within the meaning of Section 12 AO exists;
- subsequently, a check is needed to determine if a double taxation agreement (DTA) restricts the right to tax.
The draft clarifies that no permanent establishment would be created in certain situations where there have previously been uncertainties (safe harbour provisions). This relates in particular to cases where the employer assumes the costs for the home workplace, concludes a rental agreement with the employee, or does not make a workplace available at the company.
2. Control as the key criterion
Control constitutes the ultimate criterion for determining whether a fixed business facility, and thus a permanent establishment, is deemed to exist. Both national (German) law as well as Art. 5 of the OECD Model Tax Convention (MTC) require that the employer is able to have permanent control over the facility. In the case of a home workplace, this condition is routinely not satisfied as the employer does not have a general right of access, is not permitted to use the premises for other purposes and is not able to employ other staff there. In exceptional cases, a permanent establishment may be created solely if the employer either contractually or effectively gains an expanded opportunity for use.
Management permanent establishment
Cases where executive personnel work from home are particularly fraught with risk. A management permanent establishment would be created there where the actual centre of management lies. This place can also be in a managing director’s private residence. The employer’s control does not matter in such cases; the crucial factor is solely whether major business management decisions are made on an ongoing basis at that place. The fiscal administration has not yet provided a clear definition of the term ‘management role’.
The permanent representative
Another risk area is the ‘agency permanent establishment’. This is created when employees with power of attorney or signatory authority routinely play an active role in contract negotiations, or are important in effecting contracts. This place can be a home workplace and having control over the premises is not a requirement for it to be classified as a permanent establishment. In the new BMF draft, the guidelines under Article 5(5) of the OECD MTC are fleshed out and the conditions are described in greater detail than before.
4. International perspective and OECD update in 2025
In an international context, the different interpretations of the concept of a permanent establishment become apparent. Many countries closely follow the OECD MTC, however they interpret its criteria there differently depending on the tax context. The BMF draft of 2026 explicitly adopted the developments from the 2025 OECD Model Commentary and thus reinforced the importance of interpretation pursuant to the Convention. According to the OECD Commentary, the existence of a permanent establishment would be rendered obvious, in particular, if
- the employer expects or requires the work to be performed from a home office,
- no other workplace is available and
- the activity carried out in the home workplace constitutes a core activity of the company.
By contrast, the existence of a permanent establishment would be routinely denied if the home workplace is used voluntarily, or if the activity is merely of a supportive nature.
Two factors are particularly crucial for determining whether the home workplace constitutes a permanent establishment. First of all, the OECD Commentary requires a certain degree of permanence and regularity of use of the home workplace, since temporary or sporadic phases of working from home would not be sufficient; moreover, when more than 50% of the time is spent working from home then the risk goes up significantly. Secondly, the economic importance of the activity plays a major role. The more strongly the tasks carried out from the home workplace are integrated into the company’s value creation – particularly in the case of core activities or profit centre responsibility – , the more likely it is that a permanent establishment would be deemed to exist, while purely supportive or preparatory activities would generally argue against this.
Inbound cases
When foreign companies employ staff in Germany who exclusively work from home and do not exercise management or representative functions then, under German law, this generally does not create a permanent establishment. This constitutes a locational advantage for foreign employers because they do not have to register for income tax purposes.
Outbound cases
Arrangements where German companies employ staff abroad entail a lot more risk. If a foreign country recognises a permanent establishment owing to a broader interpretation of Article 5 of the OECD MTC, while Germany denies this on account of the lack of control, then a conflict of classification would arise. In such a case, the country where the work is being performed would tax the foreign permanent establishment, while Germany might possibly refuse to exempt the income paid abroad from tax or to credit the foreign taxes paid on that income due to the lack of recognition. The BMF draft of 2026 confirms that the definition of a permanent establishment within the meaning of the MTC must be assessed independently, whereby the risk of cross-border double taxation remains.
