A re-definition of the concept of a permanent establishment – what the new Federal Ministry of Finance circular of 18 June 2026 means in practice

Markus Schenk and Tobias Stiegler have been featured in a recent article in the journal International tax law (IStR Issue 15, p. 616) with the new Letter from the Federal Ministry of Finance dated 18 June 2026 deals with the concept of a permanent establishment.

Why the new BMF circular affects you directly

In its letter dated 18 June 2026, the Federal Ministry of Finance sets out the Definition of a permanent establishment in both national and international tax law, superseding the administrative interpretation from 1999. The focus is clearly on digitalisation, flexible working arrangements, working from home, and international corporate and service structures – precisely the areas in which many large corporations and medium-sized enterprises are currently growing.

The new approach: a two-stage assessment – a dual risk assessment framework

In future, a clearly worded Two-stage logic For inbound and outbound cases: First, a check is carried out to see whether, according to Sections 12 and 13 of the German Fiscal Code (AO) whether a permanent establishment or a permanent representative exists, depending on whether a double taxation agreement (DTA) overrides this right of taxation. A permanent establishment within the meaning of Section 12 of the German Fiscal Code (AO) is therefore necessary, but not sufficient – Anyone who relies solely on the absence of a permanent establishment under the terms of a treaty risks unpleasant surprises during a tax audit.

Hotspots for Family business: Working from home, management roles, service structures

Four clusters are particularly relevant for corporate groups, family businesses and small and medium-sized enterprises:

• Working from home & senior management: The managing director’s or entrepreneur’s study can be used as Head Office – in extreme cases, even the „children’s bedroom“, if day-to-day business decisions are regularly taken there.
• IT consultant, influencer & client projects: A permanent presence at the client’s premises, on-site workspaces or studios for content production may constitute a permanent establishment – even in the case of smaller, highly specialised teams.
• Market stalls & temporary outlets: Recurring assignments at the same location lasting for more than six months may, in the case of seasonal activities, constitute permanent establishments for tax purposes.
• Service and management companies: Identical governing bodies and ongoing on-site management mean that structures within the group and private equity sectors can be regarded as permanent establishments of the parent company.

What this means in practice: more documentation, more design work, more potential for disputes

The new letter leads to a a broadly defined concept of a permanent establishment based on the nature of the business, which is based largely on actual usage patterns and de facto control. The result:

• a significant increase in the workload involved in documentation and compliance (place of work, management decisions, deputy roles, internal services),
• greater scrutiny by the tax authorities of alleged „support activities“ and fragmented chains of functions, particularly within group structures and investment portfolios,
• an increasing risk of disputes in tax audits and double taxation agreement (DTA) mutual agreement procedures – including for cases already underway and those still pending.

Assess permanent establishment risks at an early stage and ensure they comply with the law

For many family businesses, medium-sized enterprises and both outbound and inbound business structures (see. TXGT blog, 28 May 2026: the case of Switzerland and Germany) this letter from the Federal Ministry of Finance marks a turning point: it addresses issues such as working from home, project work at clients’ premises, management companies and shared service centres strategic tax issues.

We’d be happy to help you with,

• to systematically assess your international operations and working models for risks relating to permanent establishments,
• to set up a bespoke documentation and governance structure,
• To structure your organisation in such a way that business objectives and tax certainty go hand in hand.