Blog: taxable in the Netherlands or Germany? What’s up with that?

There are also opportunities in Germany for many Dutch companies. However, carrying out work in another country also means that different laws and regulations apply. Consider, for example, labor legislation, but also taxes. In this blog, Alexander Crämer, ‘Rechtsanwalt’ at STRICK – Rechtsanwälte & Steuerberater in Kleve, explains in which country Dutch entrepreneurs are liable to pay tax when working in Germany.

Entrepreneurs with a Dutch BV are in principle liable to pay taxes according to Dutch tax regulations. They pay corporate tax and possibly sales tax on their profits in the Netherlands. They also pay payroll taxes for their employees. However, when a Dutch company is active in Germany, the tax liability is no longer determined on the basis of national Dutch regulations, but the tax treaty concluded between the Netherlands and Germany regulates which country may levy tax. This tax treaty supersedes national tax regulations and regulates when a company is liable to pay tax in Germany.

Paying taxes in Germany

The tax treaty concluded between the Netherlands and Germany contains various examples of situations that lead to a tax liability in Germany, for example in the case of a permanent establishment. Below are a number of examples of situations involving a permanent establishment:

1. Building, construction or installation work longer than 12 months

If a company carries out building, construction or installation work in Germany that lasts longer than 12 months, both the company and its employees may become liable to pay taxes in Germany. This applies to sales tax and payroll tax, as well as to corporate tax. Due to the extension of assignments, the acceptance of new assignments at the same workplace, the resolution of defects, the fulfillment of warranty claims and a longer construction period than anticipated, the work can sometimes take longer than planned. If the work lasts longer than 12 months in total, Germany will be given the right to levy taxes instead of the Netherlands.

2. Representative in Germany

If an employee in Germany carries out sales activities and concludes contracts with customers, these activities can also lead to a permanent establishment for the employer. According to the tax treaty between the Netherlands and Germany, the relevant agreement has been concluded with the customer in Germany. The turnover and profit achieved in Germany then form the basis for taxation. The entrepreneur would then have to pay tax on this amount in Germany. In addition, a permanent establishment could be created.

3. Home office

A permanent establishment can also arise if an employee carries out business activities in Germany and does this from his home office.

Avoidance of double taxation

The Finanzamt (the German Tax Authorities) often only determines afterwards that there is a permanent establishment. In that case, the Finanzamt imposes an additional tax. Tax has already been paid in the Netherlands. This can lead to temporary double taxation: the entrepreneur must pay additional tax in Germany, while tax has already been paid in the Netherlands. This can put a significant burden on a company’s liquidity. In some cases, the entrepreneur or his tax advisor must reclaim the tax for several years. To prevent this, it is important for entrepreneurs to obtain clarity as soon as possible whether they are liable to pay taxes in Germany or have a permanent establishment there.