Remote work permanent establishment tax risk: A home office can constitute a permanent establishment.
What begins as a flexible home office arrangement can, under OECD principles and most tax treaties, result in the creation of a permanent establishment (PE). This has implications for corporate income tax, registration, transfer pricing (TP), and payroll accounting. Ecovis experts use an example to illustrate how a permanent establishment arises and how it can be avoided.
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When can a PE arise?
A PE resulting from remote work typically arises when the foreign activity goes beyond “simply working from home”. Typical triggers include
- Control over the home office/fixed place: Working from home is required by the employer or in fact necessary. The employer provides or finances equipment, pays rent, exercises control rights, uses foreign addresses on a website or signature.
- Duration and intensity: Is the activity regular and ongoing over months or years? Is there a clear work routine abroad?
- The nature of the activity: If core functions (e.g., sales, negotiation, product development) are performed abroad, the risks of creating a PE increase.
Case study: Denmark – Germany
Scenario: A German GmbH has no Danish entity and provides equipment and a monthly home office allowance to a sales director living in Aarhus, DK, who works 100 % from home, develops the DK market, negotiates terms and has internal signing authority.
In this case, the home office constitutes a PE due to the long-term presence, the sale of goods, core business functions and support from the employer.
As a result, Danish corporation tax must be paid on the attributable profits, registration with the Danish tax authorities is necessary and TP documentation and profit allocation must be prepared.
Contrast case: The same employee performs internal analyses only, works from Denmark for purely personal reasons. It is not required by the employer and no costs are covered – the risk of a PE is significantly lower.
We handle the entire service chain: from the assessment of permanent establishment (PE) risks and contract structuring, to payroll, A1 coordination and transfer pricing documentation.
Jeanette Rodegro-Dohrn, M.Sc., Authorised Signatory, Tax Consultant, Certified International Tax Consultant, ECOVIS KSO Steuerberater + Rechtsanwälte Dusseldorf, Germany
Recommendations for companies
Before approving cross-border remote work, companies should conduct a permanent establishment (PE) assessment based on tax treaties, and document their security measures:
- Offer remote work on an optional basis
- Avoid publicly listing a foreign address
- Limit local client activities and the conclusion of contracts
- Retain evidence of available workspace in the home country
- Review roles that evolve into market-facing functions
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