In German income tax law, the term permanent establishment is defined in Section 12 AO. “According to this, a permanent establishment is any fixed place of business or plant that serves the activities of a company.” As the definition is vague, the legislator has named a number of examples in the law that are to be regarded as a permanent establishment. These include the place of management, branches, offices, factories or workshops, warehouses, points of purchase or sale, mines, quarries or other stationary, mobile or floating sites for the extraction of natural resources as well as long-term construction or assembly work.
Anything not mentioned here must be interpreted according to the wording of the law. In practice, this often leads to uncertainties, so that the courts have ultimately had to make many rulings in order to reach a decision in the dispute between the taxpayer and the tax office.
It should be noted that if a double taxation agreement between Germany and another country exists and is applicable, this takes precedence over the national rules. This may result in slight deviations from the German definition.
If a foreign company operates in Germany, the German tax authorities tend to quickly assume a permanent establishment in order to ensure that the profits are taxed for the German state. However, as soon as German companies become active abroad, the argument tends to be the other way around, so that their profits are taxed in Germany and not abroad.
