If you are planning construction work in Germany that will last at one location for more than 12 months, you must also anticipate the creation of tax obligations. What do you need to prepare for, and how much will you pay in Germany? That is exactly what this blog is about.
How does a project become a permanent establishment?
Under the Double Taxation Treaty between the Slovak Republic and the Federal Republic of Germany, a so-called permanent establishment arises if a construction project or installation/assembly work exceeds a period of 12 months. This condition is generally assessed for a specific project at a specific site.
Attention: if certain conditions are met, the durations of different projects for the same customer may be aggregated, which can likewise result in the creation of a permanent establishment.
What does this mean for you? The profit attributable to the permanent establishment is taxable in Germany. Your company is therefore obliged to file a German tax return and pay corporate income tax in Germany. Since the income is taxed in only one country, this profit will not be taxed again in Slovakia; however, it is necessary to correctly apply the double taxation relief method in the Slovak tax return.
In such a case, we recommend turning to professionals who are familiar with both Slovak and German tax legislation, to avoid unnecessary complications.
What taxes can you expect in Germany?
In Germany, you need to consider not only corporate income tax (Körperschaftsteuer) at 15%, but also the solidarity surcharge (Solidaritätszuschlag) at 5.5% of the calculated tax. The effective rate of this tax is therefore approximately 15.83%.
In addition, trade tax (Gewerbesteuer) applies, the amount of which is determined by individual cities and municipalities. In practice, the overall effective tax burden in Germany often ranges from around 25% to 30%, depending on the specific location.
You must also keep an eye on taxes for posted employees
If you carry out construction work through posted employees within the permanent establishment, you should also expect an obligation to pay wage tax and to run payroll processes on the German side. This includes registration with the relevant authorities, maintaining payroll accounting, and paying wage tax to the German tax office.
Don’t forget planning and costs
Before starting construction work in Germany, it is therefore necessary to assess in advance whether a permanent establishment may arise in your project. Based on that, set your project and contractual terms in a way that helps you avoid unpleasant surprises and allows you to include German taxation already when preparing your budget.
Your costs will also include cooperation with a German tax advisor, since filing the tax return and communicating with the authorities takes place in German and according to local rules.
ProfiDeCon has a team of tax experts directly in Germany who will be happy to help you with this complex agenda. We have been helping companies do business in German-speaking countries for more than 15 years.