Workation and Remote Work in Germany – Flexible Working Models with Tax Risks?

The increasing use of remote work and home office arrangements is leading more and more often to the question of whether this creates a permanent establishment in another country.
This may result in additional registration obligations, tax returns, and increased coordination efforts with foreign tax authorities.

The following provides an overview of the circumstances in which a permanent establishment may arise under German tax law and tax treaties, with a focus on home office scenarios.

Legal framework in Germany

The assessment of whether a permanent establishment exists is based primarily on the following rules and regulations:

  • German Corporate Income Tax Act (KStG)
  • German Fiscal Code (in particular section 10 AO, “place of management,” and section 12 AO, “permanent establishment”)
  • Double taxation treaties (DTTs) and Article 5 of the OECD Model Tax Convention on permanent establishments
  • Administrative guidance in the Application Decree to the Fiscal Code (AEAO)
  • 2025 OECD Commentary on home office permanent establishments

Concept of a permanent establishment

Under German law, a permanent establishment is a fixed place of business or facility that serves the activities of an enterprise.
Typically, three elements must be met cumulatively:

  • There is a fixed place of business activity in Germany.
  • That place is at the disposal of the enterprise and is used for its business activities.
  • The activity is carried out there with a certain degree of permanence.

In parallel, DTTs and Article 5 of the OECD Model Tax Convention define the treaty-based concept of a permanent establishment, on which foreign tax authorities also rely.

Home office — generally no permanent establishment

The German tax authorities take a rather cautious approach to home office permanent establishments.
According to the amended AEAO, an employee’s activities in their home office do not generally constitute a permanent establishment of the employer.

In practice, this means that in the following constellations, a permanent establishment will generally not be assumed:

  • The employee works from the home office primarily for personal reasons, such as workation, proximity to family, or caring for relatives.
  • The residence is neither rented by the employer nor assigned as a permanent establishment.
  • The private address is not used as the company’s business address.
  • The employee does not carry out essential customer-related or market-facing activities, for example only software development or internal back-office tasks.

Since 2025, the OECD has also used a 50% threshold as a point of reference.
A closer review is generally required in particular where an employee performs at least 50% of their working time within a 12-month period in a foreign home office.

When can a home office become a permanent establishment?

Despite this generally cautious approach, a home office in Germany or abroad may constitute a permanent establishment of the enterprise if certain risk factors coincide.

The residence is effectively used like a permanent establishment

A risk exists in particular if:

  • the residence is expressly designated as the place of work in the employment contract or by internal policies,
  • the residential address is used externally as the company’s business address, or
  • essential business activities are regularly carried out there, such as customer meetings or project management.

In such cases, the criterion of a fixed place of business may be fulfilled.

Essential business activity on behalf of the enterprise

The risk of a permanent establishment increases where, for example, the employee working from home:

  • conducts customer discussions,
  • performs sales and marketing activities,
  • substantially prepares or conducts contract negotiations,

and these activities form an essential part of the enterprise’s core business activity.

Agency permanent establishment (authority to conclude contracts)

Irrespective of the premises, a so-called agency permanent establishment may arise if the employee:

  • regularly signs contracts on behalf of the enterprise, or
  • effectively plays the decisive role in concluding contracts.

In such a case, tax law treats the enterprise as if it maintained its own branch in the state of activity.

Permanent and systematic activity

If the activity is not merely temporary or occasional but rather long-term and material to the enterprise, the risk of a permanent establishment increases further.

Special focus: place of management permanent establishment

Stricter standards apply to managing directors and senior executives.
If a substantial part of management decisions is made on a permanent basis from the home office, the place of effective management, and thus a management permanent establishment, may shift to that state.

Possible tax consequences

If a permanent establishment in Germany or abroad is affirmed, this has far-reaching consequences:

  • Tax liability of the enterprise in the relevant state for the profits attributable to the permanent establishment.
  • Obligation to file local tax returns and maintain ongoing bookkeeping in accordance with local requirements.
  • Potential additional payroll tax and VAT obligations.

The related administrative burden is regularly significant, particularly where several countries are involved.

Practical steps to reduce risk

To structure home office arrangements as legally secure as possible, the following steps are recommended:

  • Document time allocation: Record how much working time is spent in the home office in each country.
  • Clearly document the reasons: Keep written records of whether the foreign activity is carried out primarily for the employee’s personal reasons.
  • Limit powers of attorney: Employees working from a home office abroad should, where possible, neither sign contracts nor take the lead in negotiations.
  • Centralize management decisions: Management decisions should predominantly be made at the company’s official registered seat.

Conclusions

The mere fact that an employee works from a home office does not automatically create a permanent establishment under German law or under tax treaty principles.
The situation becomes critical where the home office is effectively used like a branch, the employee performs essential business or management functions, prepares or concludes contracts, and the activity is carried out on a permanent basis.

Specific home office arrangements should therefore be reviewed on a case-by-case basis in order to ensure tax-efficient and compliant structuring of international working models.



Author: Dr. Bernhard Heringhaus