Permanent establishment or branch office

There are different legal options for starting a business in a new area. The simplest option is to set up a dependent permanent establishment. On the other hand, a branch office could be registered in the commercial register. Finally, a company can also be newly established.

1. advantages and disadvantages of a permanent establishment

According to the definition in § 12 AO, a permanent establishment is "any fixed place of business or installation which serves the activities of an enterprise". e.g. the place of management, branches, offices and warehouses. A permanent establishment is dependent in relation to the main branch of the company, i.e. there is a uniform business operation at merely physically different locations. Another characteristic of a permanent establishment is that invoices are only issued in the name of the head office.

A permanent establishment must be registered with the competent trade office. An entry in the commercial register is not necessary. It should be noted that these offices may not run their own company, which differs from the head office. In addition to the company name, the registration court of the head office must be indicated on business letters with the commercial register number.

The income generated by the permanent establishment is subject to limited income or corporation tax liability. The profits of the permanent establishment are also subject to trade tax.

2. advantages and disadvantages of a branch office

A branch that is independent of the head office is called a branch office. However, it is not a separate legal entity separate from the head office. It is legally and organisationally part of the enterprise of the head office and is therefore subject to the law of the head office. However, despite this internal dependence on the main branch, it participates independently in business transactions.

The typical characteristics of a branch office at a glance:

There must be a physical separation from the head office.
The branch must be organised in such a way that it can participate independently in business transactions, i.e. it must be able to continue to exist when the main branch ceases to exist. This can be ensured above all by separate accounting.
It conducts business that is typical for the whole company, but not necessarily all similar business and not just auxiliary or executive business.
The branch must have a certain degree of autonomy in that it has its own management with its own freedom of disposition and its own business assets allocated by the head office. The business transactions of the branch are shown separately in the balance sheet of the main branch.
A branch office is created by the actual process of its establishment. An entry in the commercial register of the head office is required. The name of the branch office may be the same as the name of the head office, but may also differ from it, in which case a reference to the branch office is mandatory. According to the definition in § 12 of the German Fiscal Code, each branch office is also a permanent establishment, which is why a trade must always be reported to the trade office of the respective municipality for the branch office. The income generated by the branch office is subject to limited corporate income tax liability. The profits of the branch office are also subject to trade tax.