Businesses invest abroad for reasons that go beyond gaining access to new markets or benefiting from lower energy and labour costs. In many cases, tax incentives play an equally important role.

Many countries actively encourage foreign businesses and skilled professionals through so-called "welcome taxes" or special expatriate tax regimes. Establishing a permanent establishment in a jurisdiction with lower tax rates can significantly reduce a company's overall tax burden. In addition, transferring business assets from abroad to German permanent establishments may, under certain circumstances, benefit from a step-up for tax purposes, allowing previously unrealised gains to be recognised at a higher tax base.

However, this is where traditional tax advice reaches its limits.

• Applying double taxation agreements (DTAs): Whether the profits of a foreign permanent establishment remain exempt from German taxation under the exemption method or are subject to taxation under the credit method depends on the specific economic circumstances of the business.
• The unintended permanent establishment: Following the OECD updates introduced in 2025, businesses must exercise particular caution. Where, for example, a managing director or key account manager works permanently from a home office in Mallorca, this may unintentionally create a taxable permanent establishment. The consequences can include significant compliance risks, additional administrative burdens and, in the worst case, double taxation.