Remote Work and PEs: Reconciling German Tax Practice and OECD Standards

What the paper says

The widespread adoption of remote work poses significant challenges for applying permanent establishment (PE) rules, especially in cross-border scenarios. This article examines the differing treatment of home office arrangements under German domestic law and the OECD Model Tax Convention (OECD MC) 2017 with its corresponding Commentary (OECD MC Commentary). The recent February 2024 guidance in Germany by the German Federal Ministry of Finance provides that a home office typically does not constitute a PE except under extraordinary circumstances. This even applies when the employer (1) covers the costs for the home office and its equipment; (2) concludes a rental agreement with the employee for the home office unless the employer holds actual rights of disposal; or (3) does not provide an alternative workplace. The rationale is that the employer typically lacks sufficient ‘power of disposal’ over the employee’s private home office. Exceptions apply when the employee performs management functions conferring such control. However, the pragmatic approach applied by the German fiscal authorities contrasts with the broader interpretation in the OECD MC Commentary 2017 which may lead to unintended PE creation and double taxation. Through a comparative analysis, including selected national practices from other European countries and a case study, the article advocates for the OECD MC Commentary 2017 to integrate similar delimitation criteria to enhance legal certainty, reduce compliance burdens, and better align international tax rules with modern remote work realities.