New administrative guidance on „home office“ permanent establishments

Have we escaped the daily commute? Remote working has significantly increased in recent years, accelerated by the recent pandemic. More and more companies have been changing their working models and enabling their employees to work from home. It is now normal and part of everyday working life. In Germany this is colloquially known as called the ‘home office’ (somewhat confusing for UK nationals, whose first thoughts may be the ministerial department of the same name).

While the home office means less time in traffic jams, questions arise from a tax perspective. If an employee regularly works from home, could this constitute a permanent establishment (“PE”) of the employer? In cross-border cases, the potential tax consequences can be serious: a foreign company having a home office PE in Germany would become subject to a limited tax liability, and notification and documentation obligations. Even in purely domestic cases, the assumption of a home office PE can have tax consequences, particularly with regard to trade tax.

According to the supreme court of Germany for tax and customs/excise duty matters, the Federal Fiscal Court (the Bundesfinanzhof – BFH), for any premises to constitute a PE there must be a certain power of disposal (e.g. due to ownership or rent). Therefore, in relation to an employee’s home office, the key question is whether the employer actually has such a power of disposal over the home office. Until now, the German tax authorities had not taken a clear position on this issue; the Federal Ministry of Finance had only issued guidance on pandemic-related home office activities (and generally rejected the establishment of a home office permanent establishment). However, with the update to the Application Decree to the German Fiscal Code (AEAO) published on 20 February 2024 the tax authorities finally shared their general opinion on home office PEs:

Revised AEAO on Sec. 12 no. 4

According to the German tax authorities, the activities of an employee in a home office generally do not constitute a permanent establishment of the employer (this applies both to German domestic tax law as well as any tax treaties).

This shall even apply if:

• the employer assumes the costs for the home office and its equipment;
• the employee rents premises to the employer (unless the employer is actually authorised to use the premises for other purposes); and
• the employee is not provided with another office by the employer.

In the tax authorities‘ view, the reason for this is the fact that an employer typically does not have a sufficient power of disposal over the employee's premises (and the home office). However, as an exception, the employer will be deemed to have a PE if a remotely working employee exercises ‘management functions’ and these functions give rise to a power of disposal of the employer.

Analysis of the tax authorities’ view

From a tax treaty perspective, home office PEs were first addressed in the OECD Model Commentary Update 2017. According to the OECD Model Commentary – which is neither binding for German tax courts nor the German tax authorities and is only regarded as an ‘interpretation aid’ – a home office can constitute a PE of the company in certain cases. For instance, if there is an agreement to work from home on a permanent basis or if the employee has no other workplace at the company although the nature of the employment clearly requires an office. In such cases, it can be assumed that the employer has a power of disposal over the home office.

In contrast to the OECD, the BFH has taken a rather restrictive view: According to its case law, a sufficient power of disposal requires the employer to have permanent authorisation to use the employee's premises. According to an older ruling by the BFH, even a contractual obligation of the employee to provide the employer with an office at his/her home does not constitute a power of disposal and therefore does not constitute a permanent establishment (see BFH of 10 November 1998 - I B 80/97). However, it should be noted that in more recent case law, a certain softening of the criterion of power of disposal – at least in the case of ‘service PEs’ – can be observed. It therefore seems to be possible that the BFH will also continue to further develop its case law with regard to home office activities.
 

In principle, the now clear position of the German tax authorities on home office PEs is to be welcomed. However, the fact that many OECD member states follow the interpretation of the OECD Model Commentary and interpret the criterion of power of disposal more broadly could be problematic. Moreover, in some countries, a power of disposal is assumed even quicker than in the OECD Model Commentary: the Austrian tax authorities, for example, assume that the employer has a power of disposal over the employee's premises if at least 50% of the work is performed in the home office. Accordingly, the rather restrictive German position on home office PEs could result in an increase of international qualification conflicts.

The notion of 'management functions' exercised by an employee as an exception raises questions.  It is uncertain how this can actually establish a power of disposal of the employer over the premises. In our view, this assumption seems to be rather unrealistic. Typically, it cannot be assumed that the employer is authorised to permanently use the premises even if the employee is performing relevant management functions from home.

Outlook

Due to the risk of creating PEs, companies are often reluctant to allow their employees to work from home in a cross-border context. Although the clear positioning of the German tax authorities in the revised version of the AEAO provides further clarification in this regard, companies will likely remain reluctant as the tax consequences of remote working abroad will also need to be the assessment under the tax law of the other state involved. Nevertheless, foreign companies with employees working remotely in Germany should check whether the revision of the AEAO could lead to any changes in their tax position. In addition, it remains to be seen how the BFH will position itself on this issue.

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The Federal Ministry of Finance has published a new version of the AEAO on Section 12 AO dated February 5, 2024. In the update, the understanding of the term "permanent establishment" is explained in much more detail than was previously the case, and the view of the tax authorities on the place of management is now also articulated by the AEAO on Section 10 AO. Our colleagues Sven-Eric Bärsch and Daniel Keuper provide an initial overview in their blog post.

Does the involvement of a service company constitute a permanent establishment? This question, which is important for the real estate sector, has been the subject of case law by the Federal Fiscal Court in the past. The tax authorities have also taken a position on this in the update to the AEAO. Our colleagues Carsten Quilitzsch, Gabriel Hörnicke and Stefanie Rötting explain the details in their blog post.