Permanent Establishments often arise earlier—and more easily—than companies expect
Update on Permanent Establishments (PE): Lessons from recent German Federal Fiscal Court Cases
The establishment of a PE remains a key tax issue for companies operating internationally, as it is decisive for the allocation of taxable profits between different jurisdictions. With increasing globalization and a growing operational presence in other countries, the likelihood of a permanent establishment being created consciously or unconsciously increases - for example, through the repeated use of office space or the provision of management functions.
The most common scenario for establishing a PE is the existence of a fixed place of business in the foreign jurisdiction. However, other forms - such as, a management or a dependent agent PE - also play a significant role in international tax practice, as they can arise without the existence of a fixed place of business.
In two recent rulings, the German Federal Fiscal Court (BFH) has once again addressed the requirement of a fixed place of business to establish a permanent establishment under the tax treaty law and specified the following points:
Gold Trading Case (BFH I R 39/21) – Temporal Requirements for a PE
The BFH reaffirmed that a minimum duration of six months is required for a business facility to qualify as a “fixed” place of business. This applies both to the existence of the facility as well as to the active business operations carried out there. In the case at hand, the taxpayer operated exclusively through a facility in the UK, but only for a period of less than six months. As a result, the court concluded that no PE had been established. Furthermore, the German Federal Fiscal Court emphasized that only the period of active business activity counts toward the six-month threshold—winding-up activities do not.
Taxi Operator Case (BFH I R 47/21) – Clarification on Business Premises
In this case, the BFH ruled that even a simple but permanently used facility can be sufficient to establish a PE. A German taxi operator used office space at a Swiss taxi dispatch center—including a stand-alone container used exclusively by him—for administrative and management tasks once or twice a week. The court held that even basic infrastructure may be sufficient if key management functions such as bookkeeping and personnel oversight are carried out on-site. Consequently, a PE was deemed to exist in Switzerland, and the related income was taxable there—subject only to the progression clause in Germany.
The BFH also noted that the permanent allocation of usage rights to specific individuals (e.g., personal containers, lockers, or safes) may indicate sufficient control over the premises to constitute a PE. However, a final tax assessment must always consider the overall circumstances of the case.
Summary
These rulings highlight that the threshold for establishing a PE is often lower than expected. Measures perceived as temporary or purely organizational can, in practice, trigger significant tax consequences - such as the creation of income tax liability in the foreign jurisdiction and associated tax compliance obligations (e.g., tax registration, filing requirements, documentation duties, profit attribution and withholding obligations).
We therefore recommend that companies planning to expand internationally—whether through market entry, employee secondments, partnerships, or business development—consult a tax advisor in advance and conduct a thorough PE analysis.
The BFH rulings are available here:
