Workation and Permanent Establishment Risk: When does foreign tax liability arise?

Definition of Permanent Establishment: What Counts?

The definition of a permanent establishment is clearly outlined in tax law. Under Section 12 of the German Fiscal Code and international tax treaties, a permanent establishment refers to any fixed place of business through which a company carries out its operations. This includes:

• Offices
  
• Branches
  
• Workshops
  
• Sales outlets
  
• Construction sites (after a certain period)
  
• And even a remote employee’s home office abroad in some cases

Crucially, it’s not about ownership of a space, but about the duration and function of the activity.

Workation: Flexible Work Meets Complex Tax Rules

During a workation, employees temporarily work from abroad – often from vacation spots. But even short stays abroad raise the question: When does a workation trigger a permanent establishment risk?

Key factors include:

• Length of stay abroad
  
• Nature of the work (e.g. managerial or sales roles)
  
• Level of autonomy and decision-making power
  
• Use of infrastructure like offices or coworking spaces

If employees sign contracts, manage clients, or work abroad for extended periods, there’s an increased risk of establishing a permanent establishment in that country.

When Do I Have to Register a Permanent Establishment?

Registration is required if the nature and structure of the foreign activity meet the criteria of a permanent establishment. Risk factors include:

• Activities that are not occasional or preparatory
  
• Employees making entrepreneurial decisions from abroad
  
• Use of dedicated or shared office spaces
  
• Ongoing customer interaction or contract negotiations
  

If these elements are present, the local tax authority may classify the presence as a permanent establishment, resulting in foreign tax liability.

Consequences of Not Registering a Permanent Establishment

Failing to register a permanent establishment can lead to serious consequences:

• Back taxes and penalties abroad
  
• Double taxation if not covered by a tax treaty
  
• Legal consequences or even tax fraud accusations
  
• Damage to reputation with partners or authorities
  

Even small teams or startups can trigger this risk – especially if decision-makers work abroad for extended periods.

How to Avoid Permanent Establishment Risks During Workations

To prevent tax issues, companies should set clear internal guidelines for workations:

1. Define a maximum duration (e.g. 30 days/year abroad)
   
2. Limit the scope of work – no contracts, no sales activity
   
3. Avoid using foreign infrastructure (coworking spaces, rented offices)
   
4. Seek professional tax advice for longer stays
   
5. Use tech tools to track employee location and work activities abroad
   

Conclusion: Flexibility Requires Structure

Workation is here to stay. But the associated permanent establishment risk should not be underestimated. Companies must understand when remote work abroad leads to foreign tax obligations and act proactively.

Manage PE Risk Automatically with premote

The tool premote helps companies monitor employee workations and remote work abroad in real time. It automatically detects potential risks like the creation of a permanent establishment, issues early warnings, and ensures compliance with international tax and labor laws. This makes workation safe, compliant, and stress-free for both employees and HR teams.

Find out more about the Permanent Establishment Feature

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The information provided on this website does not constitute legal advice and is not intended to address any legal issues or problems that may arise in individual cases. The information on this website is of a general nature and is provided for informational purposes only. If you need legal advice for your individual situation, you should seek the advice of a qualified attorney.