Subsidiary, branch or permanent establishment
Three ways to operate in Germany, with very different consequences for liability, tax and effort. The third one is often not chosen — it simply arises.
The short answer
A subsidiary is a separate legal person and shields the parent; the price is that every distribution of profit is taxed a second time. A branch is legally part of the foreign company but is entered in the German commercial register. A permanent establishment is not an act of incorporation but a tax status: it exists as soon as the conditions are met — without any registration and without any intention.
| Subsidiary | Branch | Permanent establishment | |
|---|---|---|---|
| Separate legal person | yes | no | no |
| Parent's liability | limited to its contribution | unlimited | unlimited |
| Commercial register | yes, section B | yes, § 13d HGB | no |
| Corporate income tax | on the entire profit | on the profit attributed to it | on the profit attributed to it |
| Trade tax | yes | yes | yes |
| Tax on transferring profit abroad | yes, withholding tax | no | no |
| Own financial statements, published | yes | no | no |
| Can arise unintentionally | no | no | yes |
That last row is why this page exists. A subsidiary and a branch are decisions; a permanent establishment is something you end up with.
The three forms in detail
Subsidiary — usually a GmbH
A German company of its own, whose shares the foreign parent holds. It has its own management, its own books, its own financial statements, and it is liable only with its own assets.
The share capital of a GmbH is €25,000, of which at least €12,500 must be paid in before registration. Incorporation is done before a notary; the company comes into existence on entry in the commercial register.
The price of that shield is a second layer of tax: the profit is taxed in Germany, and when it is distributed to the parent, withholding tax arises on the distribution. How much of it remains depends on the parent's country of residence — more on that below.
Branch — legally the same company
A branch is not a company of its own but a permanent part of the foreign one that appears independently in business. It trades under the foreign company's name with an addition and is entered in the German commercial register under § 13d HGB.
Because it is the same legal person, the foreign company is liable for everything that happens in Germany, with all of its assets. In exchange there is no distribution and therefore no withholding tax: the profit moves within one and the same company.
A registered branch is to be distinguished from a mere dependent office that only carries out instructions. That one need not be registered — for tax purposes it may still be a permanent establishment.
Permanent establishment — a status, not an act
Under § 12 of the German Fiscal Code (AO), a permanent establishment is any fixed place of business or facility serving the activity of an enterprise. The provision lists examples: place of management, branches, manufacturing and workshop premises, warehouses, points of sale.
What matters is that nobody creates it. There is no filing, no notary and no register entry. Once the characteristics are present it exists — and with it a limited tax liability in Germany.
The permanent establishment nobody set up
This is the expensive case in practice, because it comes to light retroactively — usually in a tax audit, for years that were long since closed.
When does a permanent establishment arise without being created?
As soon as a fixed place of business serves the enterprise's activity and the enterprise has power of disposition over it. The most frequent cases:
- Building sites and installation projects. Under § 12 sentence 2 no. 8 AO they become a permanent establishment if they last longer than six months — individually, alongside one another or following one another without interruption. Several short assignments can therefore add up.
- A rented warehouse or office over which the enterprise has power of disposition, even if only one person works there.
- A permanent representative under § 13 AO — someone who conducts the enterprise's business on a sustained basis and is subject to its instructions. This creates a limited tax liability even where there is no fixed place of business at all.
- Server locations can constitute a permanent establishment where the enterprise has disposition over the hardware. Ordinary hosting with a service provider does not suffice.
Does an employee working from home create a permanent establishment?
As a rule, no. The employer has no power of disposition over the employee's home, and without it there is no fixed place of business of the enterprise. It is different where the employer rents the space, fits it out or has a right of access — then power of disposition may well be present.
The question has become more common for international employers and is decided case by case. Anyone employing staff in Germany on a lasting basis should settle it beforehand, not afterwards.
What if a double tax treaty applies?
Then the treaty's definition prevails, and it is often narrower than § 12 AO. Under the OECD Model Convention, which most German treaties follow, a building site becomes a permanent establishment only after twelve months, not six. Preparatory and auxiliary activities — a pure delivery warehouse, for instance — are excluded there.
The treaty does not simply carry over to trade tax: that tax attaches to a domestic permanent establishment. Whether one exists therefore has to be examined twice.
What happens if it is discovered late?
The tax liability existed from the outset. Returns then have to be filed for every year affected, profit has to be attributed to the establishment, and interest accrues on the arrears. Payroll tax consequences for the staff deployed there usually follow as well.
What the decision really turns on
Tax on moving profit out of Germany
The difference that most often decides the matter. When a German subsidiary distributes profit, withholding tax is deducted. A branch or permanent establishment merely transfers money within the same company, and no withholding tax arises on that.
For parents inside the EU this matters less: under § 43b of the Income Tax Act, which implements the Parent-Subsidiary Directive, no withholding tax is levied where the parent holds at least 10 per cent of the subsidiary's capital directly and has held it continuously for twelve months. Outside the EU the rate follows the applicable double tax treaty.
Losses in the start-up phase
A subsidiary's losses stay in Germany and wait there for future profits. A permanent establishment's losses may, depending on the law of the parent's country and on the treaty, be taken into account at the foreign company. Anyone expecting several loss-making years should have this examined before the structure is fixed.
Visibility and effort
A GmbH prepares its own financial statements and files them for publication — it is therefore open to inspection by anyone, which regularly helps with German customers, banks and landlords. A branch publishes no statements of its own; in return the register requires documents about the foreign company on registration.
As for ongoing effort, the forms differ less than is often assumed: bookkeeping, VAT and payroll obligations arise in all three cases as soon as work is actually carried out in Germany.
Transfer pricing
As soon as services flow between the parent and the German unit, it has to be documented that they are charged on terms unrelated parties would also have agreed. That applies to the subsidiary just as much as to the permanent establishment, where the profit has to be attributed in the first place.
What we take on
- Examining whether the planned activity in Germany creates a permanent establishment at all
- Comparing the structures against your figures, not against general rules
- Applying the double tax treaty with the parent's country of residence
- Incorporation and tax registration of the subsidiary
- Registering a branch and seeing the entry through the register
- Profit attribution and documentation for permanent establishments
- Ongoing support afterwards — bookkeeping, payroll, financial statements, returns
If the structure is still open, this is the right moment to talk. A company once incorporated can be changed, but not for free — and a permanent establishment that was overlooked cannot be undone at all.
Frequently asked questions
What is the difference between a subsidiary and a branch in Germany?
A subsidiary is a separate legal person; a branch is not. Everything else follows from that. The subsidiary is liable only with its own assets, whereas a branch commits the entire foreign company. The subsidiary prepares and publishes its own financial statements, the branch does not. And only with a subsidiary does moving profit abroad trigger withholding tax.
Do I have to register a permanent establishment?
A permanent establishment is neither incorporated nor entered in the commercial register — it arises as soon as the conditions of § 12 AO are met. For tax purposes it exists from that moment, and returns have to be filed. Depending on the activity, a trade notification and payroll registration will be required as well.
When does a building site in Germany become a permanent establishment?
Under § 12 sentence 2 no. 8 AO, when the building or installation work lasts longer than six months. Several assignments count together where they run alongside one another or follow one another without interruption. If a double tax treaty based on the OECD model applies, its longer period — usually twelve months — prevails.
Does an employee working from home create a permanent establishment?
As a rule no, because the employer has no power of disposition over the home. It can be different where the employer rents the space, fits it out or has a right of access. Independently of that, employing someone in Germany triggers payroll tax and social security obligations — the permanent establishment question is only one of several.
How much tax is due when a German subsidiary distributes profit to its foreign parent?
Withholding tax is deducted as a rule. For parent companies in the EU it falls away entirely under § 43b of the Income Tax Act where the holding is at least 10 per cent and has existed continuously for twelve months. For parents outside the EU the remaining rate follows the double tax treaty; relief has to be applied for and is not granted automatically.
Can a branch be converted into a GmbH later?
A change is possible, but it is not a conversion in the technical sense: a GmbH is incorporated and the German business is transferred to it. Depending on what passes across, this can realise hidden reserves and trigger tax. That is why it pays to think the structure through beforehand rather than correct it later.
Which form is cheapest for entering the German market?
It turns on three things: how much liability risk the planned activity carries, whether losses are expected in the first years, and which double tax treaty applies with the parent's country of residence. There is no general answer — anyone who gives one does not know your case.
Is the structure still open?
Tell us what you plan to do in Germany and for how long. We will tell you whether it creates a permanent establishment and which form fits.