Recent Developments Regarding the Concept of Permanent*

Background

The German Federal Ministry of Finance (BMF) issued a circular dated 18 June 2026, alongside an update to the OECD Model Commentary, addressing the concept of permanent establishment. This is particularly relevant for clients in the German-Luxembourg border region, where home-office work plays a central role in cross-border employment relationships.

Key Point

The BMF confirms that an employee’s private home office does not, as a rule, constitute a taxable permanent establishment for the employer, as the employer typically lacks the legal power of disposal required over the private premises. This may be different where the home office accounts for a substantial part of the employee’s professional activity: under the new principles, working at least 50 % of one’s working time within a twelve-month period in the state of residence can be an important indicator for a treaty-based permanent establishment, provided there is also a business reason for the home-office activity. Whether a permanent establishment ultimately arises under domestic law continues to depend on whether the employer has the relevant power of disposal.

Requirements

An increased risk of a permanent establishment arises in particular where an employee permanently spends a substantial part of their working time – as a benchmark, at least 50 % within a twelve-month period – working from a home office in the state of residence, and where a business reason exists for doing so.

The 50 % threshold and the “business reason” are initially relevant to whether a permanent establishment arises under treaty law; whether a permanent establishment then actually arises under domestic law continues to depend on whether the employer has legal power of disposal over the home premises.

Managing Directors and Senior Executives

Particular caution is warranted for managing directors and senior executives, since here the relevant question is not only where the work is performed but also where material business decisions are made. Where important discussions, investment decisions or instructions to staff regularly take place from a German home office, this can raise the question of whether the company’s place of effective management has shifted to Germany. For senior executives (such as the head of purchasing), a permanent home office generally does not lead to a relocation of the place of effective management, but – depending on the requirements of the current BMF circular and the updated OECD Model Commentary – may constitute a fixed-place-of-business permanent establishment or, depending on the powers of attorney held, an agency permanent establishment for the foreign company in Germany. This can have significant consequences for the taxation of the company.

Status

This reflects an update to the tax authorities’ administrative position through the BMF circular of 18 June 2026, together with a corresponding update to the OECD Model Commentary; both already apply. Whether a permanent establishment actually arises in a given case continues to depend on the specific circumstances, in particular the actual days spent at the office and in the home office, as well as the contractual arrangements in place.

Practical Relevance

Clients with cross-border employees – particularly in the German-Luxembourg region – should document actual days spent at the company premises and in the home office, review existing home-office policies and employment contracts, and seek tax advice early when planning a permanent relocation of workplaces abroad, in order to avoid unexpected tax and social security consequences. For managing directors and senior executives with regular home-office activity, it should additionally be assessed whether this could result in a relocation of the place of effective management or a permanent establishment for the foreign company.

Please get in touch with us to review your individual situation.

As of 4 September 2026

* Disclaimer: Please note that this document constitutes general client information only. In particular, it does not constitute tax, legal or other advice. Furthermore, this general client information does not replace a detailed analysis of the specific facts of your case. Should you wish to obtain such an analysis, please do not hesitate to contact us.

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