Germany–Switzerland · Permanent Establishments
Scenario 05 · Germany ↔ SwitzerlandPermanent Establishments Between Germany and Switzerland
A business does not necessarily need a subsidiary to become taxable in the other country. A fixed place of business, an office, a production or sales facility, or certain other facilities used on an ongoing basis may create a permanent establishment. The key issues then include profit attribution, the Germany–Switzerland double taxation agreement, bookkeeping, trade tax and ongoing tax returns.
Basic Principle
A permanent establishment is not a separate company
A permanent establishment is not a legally independent business. It remains part of the enterprise whose head office is in Germany or Switzerland. For tax purposes, however, the country in which the permanent establishment is located acquires the right to tax the business profits attributable to that establishment.
Article 7 of the Germany–Switzerland double taxation agreement follows this basic principle: business profits are generally taxable only in the enterprise’s state of residence unless it carries on business through a permanent establishment in the other country.
Where a permanent establishment exists, the other country may generally tax only the profits attributable to it. Profit attribution is therefore central to every cross-border permanent establishment structure.
Swiss Business with a German Permanent Establishment
Germany generally taxes the profits attributable to the Swiss company’s German permanent establishment. German tax registration, income taxation, trade tax and, where applicable, financial reporting obligations also arise.
German Business with a Swiss Permanent Establishment
Switzerland generally taxes the profits attributable to the Swiss permanent establishment. Germany must also correctly reflect the foreign permanent establishment’s results in its profit determination and treaty treatment.
The Swiss Tax Perspective
This page focuses on the German tax and accounting perspective. The Swiss taxation of permanent establishments is covered separately on TaxRep Switzerland.
Creation of a Permanent Establishment
When does a permanent establishment exist?
Not every activity in the other country automatically creates a permanent establishment. The key requirement is generally a sufficiently fixed place of business at the enterprise’s disposal, through which its business is wholly or partly carried on.
Office
An office available on an ongoing basis may constitute a typical permanent establishment if business activities are carried on there.
Production
Factories, workshops and other permanent production facilities are typical examples of permanent establishments.
Sales
A sales or business office used on an ongoing basis may establish a taxable presence in the other country.
Construction and Installation
Construction and installation projects require a separate assessment of the applicable duration thresholds and specific treaty requirements.
Agents
Certain agency and contract-concluding functions may create a taxable presence in the other country even without the enterprise having its own premises.
Home Offices
An employee’s home office is not automatically a permanent establishment. Availability, permanence and the specific business function are decisive.
Assess Domestic Law and the Treaty Separately
To determine the actual tax treatment, the first step is to establish whether a permanent establishment exists under the relevant domestic tax law. The next step is to assess whether, and to what extent, the Germany–Switzerland double taxation agreement limits the taxing rights.
Switzerland → Germany
Swiss business with a German permanent establishment
If a Swiss AG or GmbH maintains a permanent establishment in Germany, it may become taxable in Germany on the profits attributable to that establishment, even though no German subsidiary exists.
The Swiss company remains the legal entity. Germany, however, taxes the German portion of the business profits.
- German tax registration
- Corporate income tax on German permanent establishment income
- Generally also German trade tax
- Determination of permanent establishment profits
- German tax returns
- Separate assessment of VAT and payroll
German Tax Liability
The permanent establishment limits German taxation to the German business operations
For a Swiss corporation, a German permanent establishment generally gives rise to limited German corporate income tax liability on the domestic permanent establishment income.
Trade tax generally also applies, since a business carried on through a permanent establishment in Germany may be subject to German trade tax.
German taxable profit is not simply the German branch’s revenue less its local invoices. The economically appropriate profit attributable to the permanent establishment must be determined.
| Area | Swiss Business with a German Permanent Establishment |
|---|---|
| Legal entity | The Swiss company remains the legal entity |
| Germany | Taxation of the German permanent establishment’s profits |
| Corporate income tax | Relevant for attributable German income |
| Trade tax | Generally relevant for the German permanent establishment |
| Profit attribution | Allocate functions, assets and risks |
| Switzerland | Eliminate double taxation under Swiss law and the treaty |
Germany → Switzerland
German business with a Swiss permanent establishment
If a German GmbH, AG or another German enterprise maintains a permanent establishment in Switzerland, that establishment remains legally part of the German enterprise.
Under Article 7 of the treaty, Switzerland generally has the right to tax the profits attributable to the Swiss permanent establishment. Treaty relief from double taxation must then be correctly implemented in Germany.
- Determine Swiss permanent establishment profits
- Coordinate Swiss taxation
- Continue filing German tax returns
- Apply the treaty relief method correctly
- Address German trade tax separately
- Reconcile the accounting records in both countries
Double Taxation
Swiss profits remain relevant for German tax reporting
Foreign permanent establishment profits do not disappear from the German head office’s financial reporting. The German company remains the legal entity operating the Swiss permanent establishment and generally records its transactions in the company’s accounts.
For the German tax calculation, it is then necessary to determine how to treat the permanent establishment profits over which the treaty allocates taxing rights to Switzerland.
Any special domestic or treaty provisions, including provisions restoring German taxing rights, must also be examined. A blanket statement that “a Swiss permanent establishment is always fully tax-exempt in Germany” would therefore be too broad.
Profit Attribution
How much of the business profit belongs to the permanent establishment?
The central task is to distinguish the permanent establishment economically from the rest of the enterprise. The treaty generally requires profits to be attributed as if they had been earned by a comparable independent enterprise under comparable conditions.
German international tax law specifies how the arm’s length principle applies to permanent establishments. Under section 1(5) of the German Foreign Tax Act (AStG), a permanent establishment is generally treated as a separate and independent enterprise for profit attribution purposes.
The German Permanent Establishment Profit Attribution Ordinance (Betriebsstättengewinnaufteilungsverordnung) provides further detail. Simply adding up local income and expenses is therefore insufficient.
| Area of Analysis | Typical Question | Impact |
|---|---|---|
| People functions | Which individuals perform the key business functions? | Basis for allocating functions and assets |
| Assets | Which tangible and intangible assets are economically attributable to the permanent establishment? | Depreciation, amortisation and profit attribution |
| Risks | Which market, credit, product or other risks are attributable to the permanent establishment? | Affects the appropriate level of profit |
| Capital | What capital does the permanent establishment require for its functions and risks? | Financing and interest result |
| Internal dealings | What economic dealings take place between the head office and the permanent establishment? | Allocation of profits between the countries |
| Central functions | Which services does the head office provide to the permanent establishment? | Allocation of management and administrative costs |
Example
A Swiss consulting company opens an office in Germany
A Swiss company opens a permanent office in Munich. Three employees serve German clients, carry out projects and acquire new engagements. Central management, financing and some administrative functions remain in Zurich.
In this situation, attributing all revenue from German clients to Germany is not sufficient for profit attribution purposes. The analysis must establish the value created by the German personnel, the risks attributable to the German operations and the functions that continue to be performed in Switzerland.
The German permanent establishment’s profit is then derived from this functional and risk analysis.
Accounting
A permanent establishment needs a clearly documented calculation of its own results
Although a permanent establishment is not a separate legal entity, its taxable profit must be capable of being determined in a transparent and verifiable manner. The enterprise therefore needs sufficiently detailed accounting separation between the head office and the permanent establishment.
Revenue
Income must be allocated according to the economic activity, rather than solely by billing address.
Costs
Local and central costs must be allocated appropriately between the permanent establishment and the head office.
Assets
Assets, depreciation and amortisation must be attributed to the economically relevant part of the enterprise.
Internal Dealings
Economic dealings between the head office and the permanent establishment must be clearly documented.
Currencies
Where accounts are kept in CHF and EUR, currency translation and reconciliation must be organised consistently.
Documentation
The functional analysis, account structure and tax returns should reflect the same economic allocation.
German Permanent Establishment
E-Bilanz and German tax returns
A Swiss business’s German permanent establishment may give rise to separate profit determination and filing obligations for German tax purposes.
If German taxable profit is determined using the balance sheet method, electronic submission of tax balance sheet data in the E-Bilanz format may also be required.
German compliance should therefore be integrated into the Swiss accounting processes as soon as the permanent establishment is set up.
Trade Tax
Trade tax follows the geographical structure of permanent establishments
A Swiss company’s German permanent establishment may be subject to German trade tax. This creates an additional German business tax burden alongside corporate income tax.
Conversely, section 9 no. 3 of the German Trade Tax Act (GewStG) generally provides for a domestic enterprise’s trade tax base to be reduced by the portion attributable to a permanent establishment situated outside Germany.
A German GmbH’s Swiss permanent establishment must therefore also be distinguished from the rest of the enterprise’s profits for German trade tax purposes.
Profit Attribution Affects Several Taxes
Permanent establishment profit attribution affects treaty treatment and may also be relevant for corporate income tax or personal income tax and trade tax. Inconsistent allocations across these taxes should be avoided.
Employees & Home Offices
An employee in the other country does not automatically create a permanent establishment
Permanent establishment questions arise particularly often when a Swiss business employs someone in Germany or a German employer allows an employee to work regularly from a home office in Switzerland.
An employee’s home does not become a permanent establishment of the enterprise simply because work is performed there. Relevant factors include permanence, the enterprise’s actual control over and access to the workplace, and the importance of the activities performed there to the business model.
Agency and contract-concluding functions may also raise separate permanent establishment questions. Payroll tax and social security follow their own rules and must be assessed separately.
Employee Taxation ≠ Employer’s Permanent Establishment
The fact that employment income is taxable in Germany or Switzerland does not automatically mean that the employer also has a permanent establishment there.
Key Distinction
A permanent establishment and a registered branch are not the same
A permanent establishment is a tax concept. A branch (Zweigniederlassung), by contrast, is an organisational form under commercial or company law.
A permanent establishment for tax purposes can therefore arise without a branch being entered in the commercial register. Conversely, a registered branch is generally a strong indication that a permanent establishment exists for tax purposes.
| Topic | Permanent Establishment | Registered Branch |
|---|---|---|
| Nature | Basis for establishing a tax presence | Organisational form under commercial law |
| Separate legal personality | No | No |
| Commercial register | Registration is not necessarily required | Generally registered |
| Tax liability | May arise directly | A permanent establishment analysis is required for tax purposes |
| Disclosure | Not automatically subject to the rules applicable to a GmbH | Specific registration and disclosure obligations may apply |
Subsidiary or Permanent Establishment?
Both structures can serve the same market, but their tax treatment differs fundamentally
| Feature | Subsidiary | Permanent Establishment |
|---|---|---|
| Legal entity | Separate company | Part of the enterprise operating the head office |
| Liability | Generally separate under company law | The enterprise operating the head office remains directly responsible |
| Profit determination | Own business profits | Attribution from the enterprise’s total profits |
| Payments | Actual intercompany transactions are possible | Internal economic dealings within a single enterprise |
| Profit distributions | Dividends | No dividends between the permanent establishment and the head office |
| Compliance | Full compliance obligations as a separate company | Permanent establishment and head office compliance must be coordinated |
Practical Approach
Assess a Germany–Switzerland permanent establishment in eight steps
Activities
Identify the actual business activities in both countries.
Permanent Establishment
Assess the fixed place of business, duration, availability to the enterprise and agency functions.
Tax Treaty
Determine the permanent establishment definition and taxing rights under the treaty.
Functions
Allocate personnel, functions, assets and risks.
Profits
Determine the permanent establishment’s profits on an arm’s length basis.
Accounting
Structure accounts and supporting documents so that profit attribution remains transparent and verifiable.
Tax Filings
Organise tax registration, income tax filings, trade tax and E-Bilanz submissions.
Double Taxation
Reconcile the results in both countries and coordinate treaty relief.
Frequently Asked Questions
Permanent Establishments: Germany–Switzerland
What is a permanent establishment?
Is a permanent establishment a separate company?
Must a Swiss company with a German permanent establishment pay tax in Germany?
Is the Swiss company’s entire profit taxed in Germany?
How are permanent establishment profits calculated?
Must a Swiss business’s German permanent establishment pay trade tax?
How does a German business’s Swiss permanent establishment affect trade tax?
Is an employee’s home office automatically a permanent establishment?
Is a registered branch the same as a permanent establishment?
Does a German permanent establishment need its own accounting records?
Is a subsidiary simpler than a permanent establishment?
Further Tax Knowledge
Related Topics
Germany–Switzerland Tax Advice
Does your business have a permanent establishment in Germany or Switzerland?
We assess whether cross-border permanent establishments arise, allocate functions, assets and risks, and coordinate permanent establishment profits, treaty provisions, corporate or personal income tax, trade tax, accounting and ongoing compliance between Germany and Switzerland.
Arrange an Initial Consultation