Bundesministerium der Finanzen clarifies the concept of a permanent establishment: New tax risks for businesses in 2026

In February 2026, the Bundesministerium der Finanzen (BMF) published a draft circular providing comprehensive guidance on the concept of a permanent establishment (Betriebsstätte) under German tax law.

While the concept itself is not new, evolving business models — including remote work, digital operations and cross-border structures — have significantly increased its practical relevance.

At its core, the guidance addresses one key question: When does economic activity in Germany become a taxable presence?

What does this mean in practice?

The draft consolidates the tax authorities’ interpretation of Section 12 of the German Fiscal Code (AO) and aligns it with the principles of the Organisation for Economic Co-operation and Development (OECD), particularly Article 5 of the OECD Model Tax Convention.

Three scenarios are especially relevant for international businesses:

1. Remote employees working from Germany
If an employee works permanently from Germany and performs core business functions, this may trigger a permanent establishment — even in the absence of a formally rented office.

2. Dependent agents
A person in Germany who regularly concludes contracts, or plays a decisive role in their conclusion, can create a taxable presence for a foreign company.

3. Preparatory or auxiliary activities
The BMF emphasizes that exceptions must be interpreted narrowly. If the German activity forms a functional and essential part of the value chain, it is unlikely to qualify as merely preparatory or auxiliary.

Why companies should act now

For foreign companies, the draft sends a clear message: formal structures are becoming less decisive than economic substance.

The absence of a registered branch or office no longer automatically prevents a permanent establishment from arising. Tax authorities will focus on the actual functions performed in Germany.

Businesses with employees, sales representatives or management functions located in Germany should therefore assess:

• Whether their activities may create a permanent establishment
• Whether profit allocation is properly documented
• Whether contractual arrangements reflect the actual operational structure

Although the document is currently in draft form, such guidance typically shapes future tax audits and administrative practice.

For internationally operating companies, this is an opportune moment to review their German footprint and proactively mitigate potential tax exposure in 2026 and beyond.