A managing director or management board member who permanently moves the centre of their life abroad and continues to run the day-to-day business of the German company from there frequently assumes that nothing changes in the company’s tax position. After all, the registered office of the GmbH or AG remains entered in the commercial register unchanged. This assumption does not necessarily hold. German corporate income tax law links the unlimited tax liability of a corporation not only to its registered office under the articles but, with equal weight, to its place of management (Ort der Geschäftsleitung). If management is exercised abroad, a permanent establishment risk (Betriebsstättenrisiko) arises there: the company may become taxable there in addition, with the risk of dual residence, considerable double taxation and, depending on the treaty, taxation of hidden reserves in Germany.
The Place of Management as an Independent Connecting Factor: Section 10 AO
The German Fiscal Code (Abgabenordnung, AO) distinguishes two connecting factors for the taxation of corporate entities. The registered office (Sitz) under Section 11 AO is the place determined by the articles of association (Gesellschaftsvertrag or Satzung) or by law; for a GmbH, it must be located in Germany under Section 4a GmbHG (Limited Liability Companies Act), and for an AG under Section 5 AktG (Stock Corporation Act). Alongside this is the place of management under Section 10 AO. The law defines it as the “centre of the top-level commercial management” (Mittelpunkt der geschäftlichen Oberleitung), that is, the place where the decisions that matter for the day-to-day management are actually taken.
The difference from the registered office under the articles is fundamental: the place of management is a purely factual, person-related connecting factor. It can be fixed neither by a shareholders’ resolution nor by an entry in the register. What matters is where the persons authorised to represent the company, usually the managing directors or the management board, form the decisive will for day-to-day business. If a managing director permanently moves their residence abroad and continues to take the essential business decisions from there by video conference, e-mail and telephone, the place of management may in fact move with them, irrespective of what is entered in the commercial register.
A special rule applies compared with an ordinary permanent establishment. For most types of permanent establishment, Section 12 AO requires a fixed place of business over which the enterprise actually has power of disposal. This criterion is typically absent in the case of the private home office of an employee without management functions. However, Section 12 sentence 2 No. 1 AO expressly lists the “place of management” as a separate example of a permanent establishment. According to the prevailing view, a management permanent establishment therefore does not require fixed premises at the enterprise’s disposal. A home office, a holiday home, a hotel room used on a permanent basis or even changing locations may be sufficient if management is actually and repeatedly exercised there.
Unlimited Corporate Income Tax Liability: Registered Office or Management Is Sufficient
The practical significance of Section 10 AO arises from its interaction with Section 1 (1) KStG (Corporate Income Tax Act, Körperschaftsteuergesetz). Under this provision, a corporation is subject to unlimited corporate income tax liability in Germany if it has its registered office or its management in Germany. Both criteria rank equally; either one is sufficient. Under Section 1 (2) KStG, unlimited tax liability means the taxation of all income, that is, the company’s worldwide income.
If neither the registered office nor the management is located in Germany, the company is only subject to limited tax liability (Section 2 No. 1 KStG); only German-source income within the meaning of Section 49 EStG is then taxed. For a German GmbH with its registered office in Germany under its articles, this change does not occur under German law: because of its registered office, it remains subject to unlimited tax liability even if its management moves abroad. The risk therefore initially lies in additional unlimited tax liability in the state to which management moves, that is, in dual residence. Whether, and under what conditions, the other state treats the company as resident there depends on that state’s law and must be examined by an adviser in the state concerned.
If a double taxation treaty resolves the dual residence in favour of the state of actual management, a second, often overlooked risk is added: Germany may then essentially only tax the profits of a domestic permanent establishment and domestic real estate. Assets that can no longer be allocated to a domestic permanent establishment in future, such as shareholdings or intangible assets, are deemed under Section 12 (1) KStG to have been sold at fair market value. Hidden reserves are realised without any money flowing. If the new place of management is located in the EU or the EEA, the tax can, on application, be spread over five years by means of a compensatory item (Ausgleichsposten, Section 4g EStG, Income Tax Act). Since 2022, this exit taxation (Entstrickungsbesteuerung) applies irrespective of whether management is moved to an EU state or to a third country; the former deemed liquidation for moves to third countries (former version of Section 12 (3) KStG) was abolished by the Act to Modernise Corporate Income Tax Law (Körperschaftsteuermodernisierungsgesetz).
When Does the Place of Management Shift? Distinguishing Criteria
Unlike in the case of the habitual abode of individuals, there is no fixed time limit for the relocation of management, such as the six-month rule of Section 9 sentence 2 AO. What matters is an overall assessment of the actual circumstances: where, how often and with what depth of decision-making the key management of the business takes place. The following table classifies typical scenarios:
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| Scenario | Classification as a rule |
|---|---|
| Occasional video conferences during a stay abroad or a holiday | no relocation |
| Preparatory activities without a final decision (e.g. reviewing documents) | no relocation |
| Short business trips with isolated consultations | no relocation |
| Regular, recurring work from abroad (e.g. several days a week) with genuine decision-making authority | indicates relocation |
| Decisions on contracts, staff or investments are taken with final effect from abroad on a permanent basis | indicates relocation |
| Several managing directors with separate responsibilities, one of whom permanently runs their area from abroad | may indicate a partial relocation |
| Home office, holiday home or changing hotels as the place of work | indicates relocation if decisive decisions are regularly taken there |
Two points require particular attention. First, the type of place where the person stays is irrelevant: a “proper” office is not required; all that matters is where management actually takes place. Second, the risk increases where there are several managing directors with divided areas of responsibility. If even one of them permanently moves the focus of their management activity abroad, it may become difficult to assess where the centre of the top-level commercial management lies overall. At the same time, the documentation effort grows.
Dual Residence of the Company and the Treaty Tie-Breaker
If the place of management actually moves abroad while the registered office under the articles remains in Germany, dual residence may arise: the company is subject to unlimited tax liability in Germany because of its registered office (Section 1 (1) KStG) and possibly in the state to which management has moved under that state’s law, if that law links to management. Without a double taxation treaty, both states may tax the company on its worldwide income. Unilateral credit rules (in Germany, Section 26 KStG) only partly mitigate this, so that there is a risk of a considerable double burden.
If there is a treaty based on the OECD Model Tax Convention, Article 4 governs residence. Article 4 (1) of the OECD Model generally refers to the domestic law of the contracting states. Unlike for individuals, to whom a multi-stage tie-breaker rule applies, Article 4 (3) of the OECD Model contains a separate rule for companies. In the classic version, the place of effective management determines the state of residence. Many of the around 100 German double taxation treaties contain this or a comparable wording. Since the 2017 revision, by contrast, the OECD Model provides that the competent authorities determine residence by mutual agreement, taking into account the place of effective management, the place of incorporation and other factors.
Whether the classic or the newer version applies in a specific case follows solely from the respective bilateral treaty, including its protocols. The Multilateral Instrument (MLI) does not change this for German treaties: when depositing its instrument of ratification, Germany made the reservation under Article 4 (3) (a) MLI that Article 4 MLI, the tie-breaker rule, in its entirety shall not apply to any of its treaties covered by the MLI. This applies irrespective of the position taken by the other contracting state, and also to treaties that Germany only brought within the scope of the MLI at a later date. German treaty practice predominantly continues to link to the place of effective management; what is always decisive, however, is the specific wording of the treaty.
In practical terms, this means: under the classic rule, the company is resident for treaty purposes in the state of effective management, with the exit taxation consequences in Germany described above. Under the newer rule, a mutual agreement procedure is required. If the authorities fail to agree, under this version the company is in principle unable to claim any treaty benefits at all, unless the authorities agree otherwise; double taxation then remains. If there is no treaty at all, the risk of double taxation remains largely unresolved; unilateral credit rules only partly help.
The Reverse Case: Foreign Company with Management in Germany
The issue also works in the opposite direction. Equally relevant in practice is the case of a corporation incorporated abroad whose managing director or shareholder-managing director moves their residence to Germany and takes the key decisions from here. Even though its registered office under the articles and its registration remain abroad, the foreign company may then become subject to unlimited corporate income tax liability in Germany under Section 1 (1) KStG as a so-called inbound corporation (zugezogene Kapitalgesellschaft), because its place of management is located here.
The prerequisite is that the foreign company corresponds for tax purposes to a German corporation. This is decided by a type comparison (Typenvergleich): what matters is whether the company, in its legal structure, resembles a German corporation. For the US LLC, the tax authorities have established their own criteria for this purpose (Federal Ministry of Finance (BMF) circular of 19 March 2004). If the type comparison is negative, the company is treated as a partnership, with different consequences for those involved.
This must be distinguished from the civil law question of whether the company is recognised as such in Germany. For companies from the EU, the EEA and the USA (Treaty of Friendship, Commerce and Navigation of 1954), this is generally the case. For companies from other third countries that are actually managed from Germany, by contrast, the company risks being treated as a partnership with personal liability of the shareholders (Federal Court of Justice, BGH, judgment of 27 October 2008, II ZR 158/06). The company law issues of a GmbH relocating its registered office abroad and of the reverse case should therefore always be examined alongside the tax issues.
If a foreign corporation that is to be recognised is actually managed from Germany, it is in principle subject to unlimited tax liability here on its worldwide income, in addition to any tax liability that may continue at its foreign registered office. Here too, if there is a treaty, its tie-breaker rule is decisive. If merely a permanent establishment is set up in Germany without the place of management moving here, the company remains subject to limited tax liability under Section 2 No. 1 KStG for its German-source income, supplemented where applicable by trade tax.
Further Consequences: Trade Tax, Profit Attribution and Reporting Obligations
For trade tax (Gewerbesteuer) purposes, tax liability is linked to a domestic permanent establishment (Section 2 (1) sentence 3 GewStG, Trade Tax Act). Because the place of management is itself a permanent establishment, management that remains in Germany can trigger trade tax even if the majority of operational activity takes place abroad. Conversely, the registered office under the articles alone is not a permanent establishment: if management moves entirely abroad and no domestic permanent establishment remains, German trade tax liability ceases despite the registered office in Germany.
In addition, there is profit attribution under the so-called Authorised OECD Approach. For the purposes of profit attribution, the permanent establishment is treated as a separate and independent enterprise (Section 1 (5) AStG (Foreign Tax Act), as specified by the Ordinance on the Attribution of Profits to Permanent Establishments, Betriebsstättengewinnaufteilungsverordnung). The functions performed by its personnel, the assets required for them, the associated opportunities and risks, and an appropriate amount of free capital (Dotationskapital) are to be allocated to it. There are documentation obligations for the dealings between head office and permanent establishment (Section 90 (3) AO in conjunction with Section 1 (4) sentence 1 No. 2 AStG).
If a permanent establishment is set up abroad, the domestic company must notify the tax office of this under Section 138 (2) sentence 1 No. 1 AO, together with the tax return, but no later than 14 months after the end of the year (Section 138 (5) AO). Finally, establishing management abroad may trigger separate registration obligations there; this should be clarified by an adviser in the destination country. Questions of relocating a company’s registered office abroad that apply across legal forms arise in addition as soon as not just the management but the business itself is to be relocated.
Documentation and Organisation: How Companies Protect Themselves
Because the place of management shifts as a matter of fact and often gradually, the risk cannot be excluded by a one-off contractual provision but can only be limited by ongoing organisation and documentation:
- Complete documentation of decision-making processes: minutes of management meetings, resolutions stating place and date, calendar entries and travel times should be kept in such a way that it can be traced where key decisions were taken.
- Separation of preparation and decision: if only preparatory work is done abroad while the final decision is demonstrably taken in Germany, this indicates that management has not been relocated.
- A second managing director resident in Germany: such a managing director can help to anchor day-to-day management recognisably in Germany. For the personal duties and risks of the officer who moves away, see the article on managing director liability when relocating abroad.
- Regular, documented presence in Germany: recurring management meetings at the German registered office support the assumption that the centre of the top-level commercial management remains there.
- Unclear legal position: obtain a binding ruling. Where the tax treatment in Germany is not certain or is foreseeably liable to change, for example in the case of cross-border management structures planned on a permanent basis, an application for a binding ruling (verbindliche Auskunft) from the tax office (Section 89 (2) AO) should come before implementation. It binds the tax office to the ruling given for a precisely defined set of facts that has not yet been implemented, and it is subject to a fee; it does not bind the foreign tax administration. In our view, a tax adviser who does not recommend this in such a situation is acting irresponsibly: the client risks having to litigate over the outcome years later, and that costs time and money.
- Coordination with foreign advisers: the criteria for management differ from state to state; the classification in the destination country should be examined separately by an adviser there.
Checklist: Permanent Establishment Risk with Management Abroad
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| Step | Content | Typical timing |
|---|---|---|
| 1. Take stock | Where are key decisions currently actually taken? | Before planning the stay abroad |
| 2. Assessment under Section 10 AO | Is there a risk of management being permanently relocated? | Ongoing |
| 3. Check residence | Clarify German tax liability (Section 1 (1) KStG) and tax liability under the law of the destination state (with a foreign adviser) | Before the managing director moves |
| 4. Check the treaty | Is there a treaty, and which tie-breaker rule does it contain? | Before the move |
| 5. Check exit taxation | Which assets lose their allocation to Germany (Section 12 (1) KStG, where applicable compensatory item under Section 4g EStG)? | Before the move |
| 6. Set up documentation | Record minutes, calendar data and travel times in a structured way | Before implementation, ongoing thereafter |
| 7. Adapt the organisation | Where appropriate, a second managing director in Germany, clear allocation of responsibilities | Before the move |
| 8. Check trade tax | Clarify domestic permanent establishment, allocation and apportionment | On implementation |
| 9. Document profit attribution | Allocate functions, assets, risks and free capital, where relevant | Ongoing |
| 10. Notification under Section 138 AO | Report the establishment of a permanent establishment abroad to the tax office (with the tax return, no later than 14 months after the end of the year) | After implementation |
| 11. Consider a binding ruling | Legal certainty vis-à-vis the German tax authorities before a tax audit | Before the move |
| 12. Involve foreign advisers | Clarify the criteria for management and registration obligations in the destination country | Before the move |
Example
Example: Michael is the shareholder-managing director of a GmbH with its registered office in Munich and plans to move to Portugal permanently. The GmbH is to remain registered in Munich unchanged. In future, Michael intends to take all operational decisions (conclusion of contracts, personnel matters, approval of investments) from his new residence by video conference, without appointing a second managing director or providing for regular in-person meetings in Germany.
Without prior review, it would be overlooked that the place of effective management could thereby move to Portugal. The GmbH could become subject to unlimited tax liability there in addition under Portuguese law (to be examined by an adviser there). Under the tie-breaker rule of the German-Portuguese double taxation treaty of 1980, it would then be deemed resident in Portugal for treaty purposes: Article 4 (3) of the treaty with Portugal allocates a company resident in both states to the state in which its place of effective management is situated. The MLI does not change this rule because of the German reservation on Article 4 MLI. Germany could then essentially only tax domestic permanent establishment profits, and for assets that can no longer be allocated to Germany, the hidden reserves could be taxed under Section 12 (1) KStG, spread over five years on application (Section 4g EStG). Tax planning in advance, for example through documented management meetings in Munich or the appointment of a second managing director resident in Germany, makes the consequences for the company and the managing director easier to plan.
Conclusion
The relocation of a managing director or management board member abroad can have an impact on the tax residence of the company itself. Because Section 10 AO defines the place of management as a factual connecting factor alongside the registered office under the articles, operational management exercised permanently from abroad may already trigger additional unlimited tax liability there and thus dual residence. If a double taxation treaty then allocates residence to the other state, Germany may additionally tax hidden reserves (Section 12 (1) KStG). The risk exists as a mirror image for foreign companies whose management moves to Germany. Anyone planning permanent management from abroad should review organisation, documentation and the treaty position in advance.
Frequently Asked Questions
Does my GmbH remain taxable in Germany if I move abroad as managing director?
Yes, under German law the GmbH remains subject to unlimited corporate income tax liability because of its registered office in Germany under its articles (Section 11 AO, Section 1 (1) KStG). In addition, however, it may become taxable in the state to which you move if management is located there. If a double taxation treaty allocates residence to the other state, Germany may essentially only tax domestic permanent establishment profits.
Is a home office abroad enough for a management permanent establishment?
It may be. Section 12 sentence 2 No. 1 AO expressly lists the place of management as a permanent establishment; according to the prevailing view, a fixed facility at the enterprise’s disposal is not required for this. What matters is whether the decisive decisions are regularly taken there.
From when is management deemed to have been relocated abroad?
There is no fixed number of days. What matters is an overall assessment: where, how often and with what depth of decision-making the company is actually managed. Occasional video conferences while on holiday are usually not sufficient, whereas contractual, personnel and investment decisions taken permanently abroad are.
How is the dual residence of the company resolved?
This is governed by the respective double taxation treaty. Most German treaties refer to the place of effective management; newer versions require an agreement between the authorities, without which treaty benefits are in principle lost. The MLI does not change the tie-breaker rule of German treaties because of a German reservation.
How can I protect against the risk in advance?
Document where decisions are taken and hold regular management meetings at the German registered office. A second managing director resident in Germany can anchor management in Germany. A binding ruling under Section 89 (2) AO creates certainty vis-à-vis the German tax office but does not bind the foreign state.
Attorney Dr. Johannes Fiala and the firm have published extensively on international tax and company law and advise companies and their managing directors on the tax consequences of management abroad, from determining the place of management to safeguards through documentation and organisation. Please get in touch with the firm without obligation to discuss your plans in an initial consultation.
