BMF draft on the concept of permanent establishments – Key content and consequences

On February 13, 2026, the Federal Ministry of Finance (BMF) sent associations a draft of a new BMF letter on the "Administrative principles for the concept of a permanent establishment and creation under domestic and international tax law" (Draft) and requested comments by March 13, 2026.

The Draft is intended to largely replace the permanent establishment administration principles of December 24, 1999, last amended by letter dated December 22, 2016 (Permanent Establishment Administration Principles) with regard to the concept and establishment of permanent establishments. The aim is, in particular, to systematize the now extensive Federal Supreme Fiscal Court (BFH) case law, to sharpen the role of the power of disposal, and to reflect OECD developments (OECD Model Tax Convention 2025 and Model Commentary).

Below, we summarize the main contents of the draft and the differences from the Permanent Establishment Administration Principles.

Structure of the letter

The draft is divided into three parts: 

• Part I – General: Domestic concept of permanent establishment (Section 12 of the German General Tax Code (AO)) and permanent representative (Section 13 AO), concept of permanent establishment under treaty law (Art. 5 OECD-Model Tax Convention) and relationship between the provisions.
• Part II – Individual cases: Typical case constellations, such as, in particular, activities in third-party premises, service or management companies, home offices, influencers, and the provision of personnel.
• Part III – Application rules: Repeal of the Permanent Establishment Administrative Principles insofar as they relate to the concept and establishment of permanent establishments; continued application of the administrative principles for the allocation of permanent establishment profits (VWG BsGa) for profit allocation purposes.

This will make a clear distinction in future between issues relating to the establishment of a permanent establishment (Draft) and profit allocation (VWG BsGa).

General

Domestic tax law vs. treaty law (DTA)

The Draft emphasizes that the concept of a permanent establishment is fundamentally determined in accordance with Section 12 AO. Double Taxation Agreements (DTA(s)) only have a limiting effect in a second step. A two-stage review is therefore expressly provided for:

• In a first step, it must be examined whether the requirements for a permanent establishment under Section 12 AO or a permanent representative under Section 13 AO are met.
• In a second step, it must be examined whether a DTA restricts Germany's right of taxation, i.e., whether a permanent establishment (representative) also exists under treaty law. In this examination, it should be noted that the domestic concept of a permanent establishment may differ from the concept of a permanent establishment under treaty law.

In detail:

Domestic concept of a permanent establishment (Section 12 AO)

The draft discusses the constituent elements of a permanent establishment pursuant to Section 12 sentence 1 AO. According to this, a permanent establishment requires:

• a business facility or installation
• with a local and permanent fixed relationship to the earth's surface (local and temporal permanence),
• which directly serves the activities of the enterprise and
• over which the taxpayer has more than temporary power of disposal.

The BMF emphasizes, with reference to recent BFH case law (BFH rulings of 18 December 2024, I R 47/21 and I R 39/21), the interplay between the individual criteria. Unlike previously, the statutory criteria for establishing a permanent establishment are no longer to be examined in the manner of a sequential "checklist" to be ticked off one by one. Instead, a weakly pronounced criterion may, in a given individual case, be compensated by another criterion that is strongly pronounced.

Furthermore, it is confirmed that every taxpayer who generates income from profits has a permanent establishment at least at the place of management (cf. Section 12 sentence 2 no. 1 AO). Accordingly, there is no such thing as income without a permanent establishment ("no floating income," as already stated in AEAO on Section 12, mn. 7). If there is no or no other fixed place of business, the taxpayer's home is generally considered to be his place of business, even if it is classified as part of the private assets (BFH ruling of December 20, 2017, case-no. I R 98/15).

Definition of permanent establishment according to DTA (Art. 5 OECD-MA)

The Draft emphasizes that the domestic concept of a permanent establishment (Section 12 AO) and the concept under treaty law (Art. 5 OECD-Model Tax Convention) are basically the same, but also points out some key differences:

• One significant difference concerns the performance of purely preparatory or auxiliary activities, which do not constitute a permanent establishment under treaty law pursuant to Art. 5 (4) OECD- Model Tax Convention, whereas domestic law does not contain such an exception.
• Another difference is that, under treaty law, a fixed place of business requires that at least part of a company's business activities be carried out through it. Section 12 AO, on the other hand, does not require actual use of the business facility; rather, it is sufficient for the business facility to be purely abstractly suitable for promoting the business purpose.
• In the case of construction and assembly work pursuant to Art. 5 (3) OECD-Model Tax Convention, the Draft clarifies, among other things, that mere construction or assembly supervision – contrary to the OECD Model Commentary – does not constitute a permanent establishment; in this way, the BMF accommodates Germany's reservation to the OECD Model Commentary.

A key innovation is the explicit inclusion of the anti-fragmentation clause of Art. 5 (4.1) OECD-Model Tax Convention. It is intended to counteract artificial bifurcations of activities and functions by restricting the application of Art. 5 (4) OECD- Model Tax Convention. This occurs in cases where business activities with complementary functions are divided between different business establishments of one enterprise or several associated enterprises. The aim of this division is to avoid the creation of a permanent establishment under treaty law by making use of the permanent establishment exception under Art. 5 (4) half-sentence 2 OECD-Model Tax Convention by carrying out only preparatory or auxiliary activities in the respective establishments.

Permanent representative (Section 13 AO vs. Art. 5(5), (6) OECD-MA)

Finally, it is also important to note that, in the case of an independent representative pursuant to Art. 5 (6) OECD-Model Tax Convention, there is no representative permanent establishment under treaty law.

The Draft also clarifies that the term of permanent representative under Section 13 AO is not synonymous with that of a representative permanent establishment under Art. 5 (5) and (6) OECD-Model Tax Convention, so that both definitions must be examined independently of each other:

• A permanent representative pursuant to Section 13 sentence 1 AO is a person who manages the business of a company on an ongoing basis and is subject to its instructions. This applies in particular to persons who on an ongoing basis conclude or broker contracts, solicit orders, or maintain a stock of goods or merchandise and make deliveries therefrom on behalf of an enterprise. Unlike a permanent establishment under Section 12 sentence 1 AO, no fixed place of business is required, and accordingly no attribution of such a facility to the principal of the permanent representative is necessary.
• Pursuant to Art. 5 (5) OECD-Model Tax Convention, a representative permanent establishment under treaty law is established if a person usually concludes contracts for the company or at least plays a leading role in the conclusion of contracts that are regularly concluded by the enterprise without significant changes. A power of attorney to conclude contracts is generally not required. A representative within the meaning of Art. 5 (5) OECD-Model Tax Convention may also qualify as such without a power of attorney to conclude contracts, if he or she plays the leading role in contract negotiations in respect of contracts that are regularly concluded by the enterprise without significant changes.

An important role in practice is played by the independent representative pursuant to Art. 5 (6) OECD-Model Tax Convention, which does not give rise to a permanent establishment under treaty law. According to the Draft, the overall circumstances of the individual case must be assessed. Key criteria include the representative's obligations towards the enterprise and, in particular, whether the representative bears entrepreneurial risk. The additional rule introduced by the 2017 OECD Model Tax Convention, under which a person is not considered independent if he or she acts exclusively or almost exclusively for one or more enterprises with which he or she is closely associated, is generally not reflected in Germany's existing DTAs. However, the BMF takes the view that these criteria should nevertheless be taken into account when examining German DTAs.

Individual cases

Part II of the Draft explains the principles using typical individual cases. In practice, acting in foreign premises, service and management companies, and home offices are likely to be particularly relevant. The BMF also addresses influencers for the first time.

Working in third-party premises

According to the Draft, third-party premises serve as business facilities for the taxpayer's own enterprise if the taxpayer carries out his own business activities in these premises with a certain degree of continuity, whereas merely working on the premises of the contractual partner is not sufficient.

The distinction can be demanding in individual cases. For example, a cleaning company that cleans a client's premises does not establish a permanent establishment due to insufficient territorial nexus and lack of power of disposal, whereas IT consultants who spend twelve months implementing a merchandise management system at a client's premises and use desk sharing may establish a permanent establishment. Unlike the cleaning company, the premises serve the IT consultant not merely as the object at which the activity is carried out, but as a fixed place of business through which the IT consultant's activities are directly conducted. Furthermore, depending on the contractual arrangements, the BMF takes the view that the IT consultant may be considered to have the client's premises available for use at any time for the duration of the project.

Service and management companies

According to the Draft, in accordance with BFH case law (BFH ruling of August 24, 2011, case no.: I R 46/10, and of March 23, 2022, case no.: III R 35/20), a permanent establishment can also be established under certain conditions by commissioning a service or management company on its premises (as already stated in AEAO on Section 12, no. 3).

In this case, a lack of power of disposal can be replaced by the taxpayer's own entrepreneurial activity on the premises, for example, if the management bodies are identical or if there is on-going, sustained monitoring on site.

On the other hand, the sole transfer of tasks, even comprehensive ones, without the client simultaneously carrying out its own business activities on the third-party premises does not lead to the creation of a permanent establishment.

Home office

It is clarified that an employee's work in their home office does not generally constitute a permanent establishment of the employer (as already stated in AEAO on Section 12, mn. 4).

The reason for this is that the employer usually does not have sufficient power of disposal over the private premises. Neither a contractual right of access to inspect documents nor the assumption of costs, the furnishing of the home office, or the lack of an alternative workplace at the employer's premises constitute sufficient power of disposal. Even a rental agreement for domestic premises between the employee (landlord) and the employer (tenant) does not normally result in a permanent establishment; the only exception is if the employer actually has a right to use the premises for other purposes, such as to send other employees there.

However, the Draft provides for two significant exceptions: 

• The exercise of management functions in the home office can establish a management permanent establishment.
• A representative permanent establishment in a home office is possible if the requirements of Art. 5 (5) and (6) OECD-Model Tax Convention are met.

The comments on influencers are new.

Influencer

The Draft's comments on influencers are new. The Draft defines influencers as persons who publish audio, visual, or audiovisual content on a wide variety of topics on a sustained basis, typically via social networks or streaming platforms. If they generate commercial income, they have at least a management permanent establishment within the meaning of Section 12 sentence 2 no. 1 AO; otherwise, the general principles of the domestic and treaty-based definition of a permanent establishment apply.

Application rule

The Permanent Establishment Administration Principles are repealed insofar as they deal with the concept of permanent establishment and its creation in domestic and international tax law.

Otherwise, the Permanent Establishment Administration Principles continue to apply insofar as they so determine, in particular in cases where neither Section 1 (5) of the German Foreign Tax Act (AStG) nor the provisions of the BSGaV are applicable, as well as for the purposes of Section 1 (5) sentence 8 AStG.

The new BMF letter shall apply in all open cases, provided that no statutory provisions preclude this.

Summary

The most important changes in the Draft can be summarized as follows:

• Systematics: While the Draft focuses on the definition and creation of the permanent establishment, the VWG BsGa continues to focus on the allocation of profits.
• Doctrine of interaction: The constituent elements (fixed place of business, territorial nexus, power of disposal) are understood as an interacting system; the previous "checklist logic" is expressly abandoned.
• Power of disposal: The taxpayer's power of disposal over the permanent establishment is identified as a key criterion and specified on the basis of recent BFH case law.
• Implementation of OECD principles: The Draft incorporates the updates to the OECD Model Tax Convention 2025 and the Model Commentary, adopts the anti-fragmentation clause of Art. 5 (4.1) OECD-Model Tax Convention, and modernizes the concept of representative permanent establishment.
• New case groups: Home offices (including management functions and representative permanent establishments) and influencers are expressly regulated.

Practical implications

Companies should use the draft to:

• review existing inbound and outbound structures in light of the increased role of the doctrine of interaction and power of disposal;
• design home office and remote work arrangements (especially abroad) in such a way that no unintended permanent establishments arise, while at the same time recognizing special cases such as management and representative functions;
• review fragmented structures and agent/representative models for risks arising from anti-fragmentation and representative permanent establishments.

We would be happy to assist you in this regard and with any other questions on international tax planning.