No permanent establishments through working from home
Due to the lack of common international criteria there is a risk for a company that an employee's cross-border mobile home office activity constitutes a permanent establishment resulting in tax obligations abroad. Against this background, the key associations of the German industry pointed out the need for an internationally coordinated approach in their joint submission to the EU and BIAC.
Over the last years, remote working has considerably gained importance for the future of work, especially during the COVID-19 pandemic, which further accelerated previous developments. In business practice, cross-border remote working also became increasingly important. However, cross-border remote work raises various taxation issues, especially in cases where employees live abroad for an extended period of time. As a result, the employer may face the problem of "unintended permanent establishments".
If cross-border remote work results in the unintended constitution of a permanent establishment abroad, the employer generally faces a limited tax liability under foreign law. This leads to extensive registration and declaration obligations abroad, as well as requirements for profit delimitation, with the additional possibility of sanctions in the event of non-compliance. Additionally, obligations in the taxation of wages arise abroad and, depending on the structure of the double taxation agreement possibly for the employee as well – which requires the implementation of additional internal processes.
Therefore the key associations of the German Industry adressed the above mentioned issues in their joint submission to the EU and the Business and Industry Advisory Committee to the OECD on 13 December 2021 and called for the creation of clear legal conditions for the establishment of tax permanent establishments.