Remote work permanent establishment tax risk: A home office can constitute a permanent establishment

A German GmbH with no Danish entity provided equipment and a monthly home office allowance to a sales director living in Aarhus, Denmark, who worked 100% from home, developed the Danish market, negotiated terms and had internal signing authority. The company faced the challenge of understanding whether this remote work arrangement would create a permanent establishment (PE) in Denmark, which would trigger Danish corporation tax obligations, registration with Danish tax authorities, and the need for transfer pricing documentation and profit allocation. What begins as a flexible home office arrangement can, under OECD principles and most tax treaties, result in the creation of a permanent establishment (PE), with implications for corporate income tax, registration, transfer pricing (TP), and payroll accounting.

ECOVIS experts conducted a permanent establishment assessment based on tax treaties and provided recommendations for companies to avoid creating a PE. The analysis identified that in this case, the home office constituted a PE due to the long-term presence, the sale of goods, core business functions and support from the employer. As a result, Danish corporation tax must be paid on the attributable profits, registration with the Danish tax authorities is necessary and transfer pricing documentation and profit allocation must be prepared. ECOVIS provided guidance on the entire service chain: from the assessment of permanent establishment (PE) risks and contract structuring, to payroll, A1 coordination and transfer pricing documentation.

The case study illustrates when a PE arises from remote work. A PE resulting from remote work typically arises when the foreign activity goes beyond "simply working from home." Typical triggers include control over the home office/fixed place (working from home is required by the employer or in fact necessary, the employer provides or finances equipment, pays rent, exercises control rights), duration and intensity (the activity is regular and ongoing over months or years with a clear work routine abroad), and the nature of the activity (if core functions such as sales, negotiation, product development are performed abroad, the risks of creating a PE increase). The analysis provided recommendations for companies to conduct a permanent establishment (PE) assessment based on tax treaties before approving cross-border remote work and to document their security measures.