International tax laws
International tax laws: Foreign companies that wish to operate in Germany soon realize that German customers and partners prefer to have a local, preferably German speaking, point of contact that can be reached easily if they have any questions. The ideal solution is to set up a Permanent Establishment in Germany.
There are two types of Permanent Establishments that can be set up in Germany.
Foreign companies can register an independent Permanent Establishment, as a legally independent entity that has the right to execute contracts in its own name. Or they can register a dependent Permanent Establishment. Dependent Permanent Establishments are like an ‘extended arm’ of the foreign company; they execute contracts and issue invoices on behalf of the foreign parent company. Such dependent establishments do not even have their own bank account in Germany.
Business registration: Registering a Permanent Establishment in Germany at the tax authorities
Registering a dependent Permanent Establishment in Germany is much easier than registering an independent PE. Newly set up Permanent Establishments must be registered in Germany.
Registration of a Permanent Establishment in Germany is subject to the company having an authorized local representative. Lawyers and tax advisors can help foreign companies to register a Permanent Establishment in Germany. Independent Permanent Establishments have to be registered in the trade register.
Dependent Permanent Establishments can be set up also by non-EU businesses.
Companies from other EU Member States are free to set up a branch in Germany. In accordance with the freedom of establishment principle, EU companies may register a dependent Permanent Establishment in Germany without any legal hurdles. Companies from other countries can also set up a dependent Permanent Establishment in Germany at any time. But employees of dependent Permanent Establishments in Germany do indeed need a work permit. And the same applies to the manager of the dependent Permanent Establishment in Germany. The only exception is, if they only travels to Germany occasionally, to check the dependent Permanent Establishment.
Registering a Permanent Establishment in Germany that employs foreign personnel
A foreign citizen can be appointed as managing director of a dependent branch in Germany only, if they are legally allowed to enter the country at any time. Citizens from third countries may apply for an entry permit at the German consulate, after registering a Permanent Establishment in Germany.
It is easier to obtain a work permit for foreign citizen non-managerial employees, once the Permanent Establishment has been set up in Germany. Issuance of the work permit depends on the industry sector and the amount of the investment in the Dependent Permanent Establishment. Work permit applications are evaluated by taking into account whether (i) the foundation of the PE in Germany involves an investment of more than one million euros, (ii) more than ten jobs are created, and (iii) particularly innovative products are manufactured or regional needs are met.
Watch out for taxes!
When operating a Dependent Permanent Establishment in Germany, bear in mind that you have to pay taxes for certain sales activities of your DPE in Germany.