Due to the pandemic, mobile working from the home office increased. Companies were forced by entry bans/restrictions and other government-initiated protective measures such as the two lockdowns in Germany, the obligation to home office, and the mandatory home office orders to prevent the spread of the coronavirus.
One question that has not yet been clarified is whether the relocation of the place of executive activity of management during the period under consideration of the pandemic can lead to a relocation of the place of management of a corporation or establishes a permanent establishment in a state other than the company’s state of residence.
During the pandemic, there were weeks and months of home office working. As a result, relevant and strategic decisions were made from the home office, which may have resulted in a pandemic related relocation of the management. For example, if a foreign person managing a business, due to the provisions of the pandemic, carries out his or her activities at his or her domestic place of residence, the company’s place of management may change. The foreign company may become unlimited taxpayer in Germany.
The same problem may occur with regard to a permanent establishment leading to a limited tax liability of a foreign company in Germany. The preconditions of a permanent establishment - a fixed business facility of more than temporary duration – may be fulfilled in case of a managing director working from home for a longer period of time due to the pandemic and the state orders.
Besides the OECD guidelines there are no specific circulars of the German fiscal authorities regarding the pandemic related relocation of the place of management, so reliable rulings are missing so far. Foreign companies may seek to support their argumentation based on the OECD guidelines as well as an analogue application of the existing bilateral consultation agreements.
In short, it remains important that instances of mobile working, in particular those where management activity is undertaken, are reviewed thoroughly to ensure that potential risks are considered.
Christiane Anger
christiane.anger@bdo.de