Selling Across Borders: VAT and Permanent Establishment Basics

Why tax questions often come too late with the first foreign deal

The first order from Austria, the first delivery to France, the first installation job in Poland: for many small businesses, foreign business begins with an inquiry, not with a plan. The invoice is written as always, and only the tax advisor or a customer query reveals that something is missing. VAT mistakes can then quickly cost the margin of an entire order.

This article therefore asks: Which basic tax rules must an owner know before selling across borders, and where do the typical mistakes lurk? To answer it, we first clarify the terms and a simple thinking model with two questions, then go through the most common types of transaction, look at permanent establishments, weigh two views on the effort, and finally derive a check before the first order.

The thinking model: two questions, two principles

Cross-border taxes seem confusing because two different taxes work according to two different logics. It helps to keep them strictly separate.

VAT is a tax on consumption. In principle, the destination principle applies: the tax should arise in the country where the goods or services are consumed. The question is therefore: Where is consumption, and who owes the tax? Income taxes, meaning income tax, corporate tax, and Germany's local trade tax, by contrast tax profit. For them, the permanent establishment principle applies: another country may only tax the profit of a German business if the business has a permanent establishment there. The question is: Does the business have a fixed place abroad from which it operates?

An everyday analogy: anyone who eats in a restaurant on vacation pays the tax on the meal where they eat, regardless of where they come from. That is VAT. Anyone who opens their own restaurant there also pays tax on the profit in the vacation country. That is the permanent establishment. One affects every customer, the other only those who settle down.

For VAT, what counts is where consumption takes place. For profit, what counts is where the business settles. Mixing the two leads to mistakes in both.

VAT: the most common cases in the EU and beyond

Simplified rules apply to trade with businesses in other EU states, but they have precise conditions. The following overview shows the four most common cases in simplified form.

The most common mistake in the first case is an unchecked identification number. Since 2020, a valid customer number and a correct EC sales list have been conditions for the exemption. If either is missing, the exemption lapses and the tax office may claim German VAT, which the business can hardly still charge to the customer. The number can be checked free of charge via the European Commission's VIES system or at the Federal Central Tax Office, as Due diligence on business partners also describes.

For services, the basic rule is simpler but has exceptions. Services connected with real estate, such as trade work on a building, are deemed supplied where the property is located. A registration in the other country may then become necessary. Events and transport also have their own rules.

Deliveries to countries outside the EU

For exports to non-EU countries such as Switzerland, the United Kingdom, or the US, the delivery is generally VAT-exempt in Germany if the export is proven, usually via customs' electronic export procedure. In the destination country, import VAT and possibly customs duties arise instead. Who bears them and who handles the import is governed by the contract, usually through the Incoterms, the standardized delivery clauses of the International Chamber of Commerce.

For small businesses, the risk here lies less in the tax itself than in the agreement. Anyone who delivers free to the customer's door without factoring in duties and import VAT gives away margin, and anyone who leaves the import to the customer without saying so clearly risks disputes and delivery delays. Currency risks in exports describes how the choice of invoice currency affects risk, and Exports and sales what mid-sized companies should look out for in new markets.

The permanent establishment: when the foreign country also taxes

Under Section 12 of the German Fiscal Code, a permanent establishment is any fixed place of business or facility that serves a company's activity, such as an office, a workshop, or a warehouse. A special form is the construction and installation permanent establishment: under German law, it arises for construction or installation work lasting more than six months, without requiring a fixed facility. Most of Germany's double tax treaties, by contrast, follow the OECD Model Tax Convention and set the threshold at twelve months; some deviate from this.

The topic has become more pressing, particularly for machine and plant builders. On February 13, 2026, the Federal Ministry of Finance presented the draft of a new circular on the concept of permanent establishment, the first update since 1999. According to an analysis by Grant Thornton, it emphasizes, among other things, that even small, exclusively used areas at the customer's site can be sufficient; Germany's Federal Fiscal Court has, for example, considered a locker sufficient. Several contracts can count as one single project, subcontractor time may be attributed, and breaks due to weather or material shortages do not interrupt the period. The draft may still change before the final version.

A permanent establishment has consequences beyond tax: registration in the other country, tax returns there, often obligations to withhold wage tax for the employees deployed, and an allocation of profit between the countries. Besides a fixed facility, a dependent agent abroad who regularly concludes contracts in the business's name can also create a permanent establishment. Anyone using a sales partner abroad should therefore clarify whether it acts in its own name or in someone else's. Sales partnerships describes how to set up such partnerships.

What research says about tax effort and business size

That complying with tax obligations weighs relatively more on small businesses is well documented in research. In an overview of studies on VAT compliance costs, Walpole (2014) summarizes that such costs are usually regressive, meaning they hit small companies harder relative to their size than large ones, and that VAT causes higher compliance costs than some other taxes. He proposes indicators that show whether a tax system causes unnecessarily high costs.

Gallemore and Jacob (2025) show for the US that stricter enforcement of corporate taxation is associated with fewer establishments and less employment in a region, especially where compliance costs are high and access to external financing is limited. Azam and Mazur (2019) describe how digital business models lead companies to become liable for VAT in many countries at once, and argue for technical solutions that take the burden off suppliers.

Two conclusions follow for small businesses. The costs of the first foreign transactions are mainly learning costs and arise once. And simplifications such as the OSS procedure or the single registration that the EU is expanding are particularly valuable for them. Robins, Horvat, and Magarian (2015) recommend that smaller companies acquire a basic understanding of permanent establishment, tax treaties, and legal form before expanding abroad, not to design structures themselves but to ask the right questions.

What changes with ViDA by 2030

On March 11, 2025, the EU adopted the ViDA reform package, short for VAT in the Digital Age. It entered into force on April 14, 2025 and will take effect gradually until 2035. Two components matter for small businesses with customers in other EU states.

1. From July 1, 2028: single VAT registration

   The OSS procedure will be extended to further cases so that companies need to register in other member states less often.

2. From July 1, 2030: digital reporting requirements

   For transactions between businesses in different EU states, structured electronic invoices become mandatory, with their data reported to the tax administration promptly. The EC sales list in its current form will then disappear.

For German businesses, this follows on from the domestic e-invoicing obligation. From 2027, companies with more than 800,000 euros in prior-year turnover must issue e-invoices to domestic business customers, and from 2028 all others, as The e-invoicing obligation describes. Anyone who maintains their master data properly now, including customers' identification numbers, will have considerably less work in 2030.

Two views: clarify everything in advance or learn step by step?

Both attitudes have their place. For goods deliveries to businesses in the EU, the effort is manageable if the identification number, evidence, and report are correct, and a step-by-step approach is justifiable. For installations, construction work, and transactions with private customers abroad, it is not, because registration obligations and permanent establishments can arise whose consequences are hard to reverse.

I therefore consider a rule based on the type of transaction rather than on revenue to be sensible: each new type of transaction is discussed once with the tax advisor before the first order, after which a written process description applies. This keeps the costs one-off, and sales knows what it may promise.

The border check before the first order

From the two-question thinking model I derive a border check that takes a quarter of an hour before each new foreign transaction and prepares the conversation with the tax advisor.

• Is the customer a business or a private individual, and in which country is it based?
• Am I delivering goods, providing a service, or working on the customer's property or building?
• Have I checked the customer's VAT identification number and filed the result?
• Who bears transport, duties, and import VAT, and is this in the offer?
• Will my people be on site for more than six months, even when several contracts are added together?
• Does someone abroad regularly conclude contracts in my name?

Anyone who answers yes or maybe to the last two questions should talk to the tax advisor before committing. The other questions belong in an offer template that sales uses anyway. The first export order describes which other checkpoints are due with the first export order, from payment terms to customs.

Conclusion: separate two questions, clarify early, document properly

To the guiding question: before the first cross-border sale, an owner should know two principles. For VAT, what counts is where consumption takes place, and clear rules follow from this for deliveries and services to businesses and private customers. For profit, what counts is whether a permanent establishment arises abroad, and this can happen faster than expected with installations and agents. The typical mistakes are unchecked identification numbers, missing evidence, overlooked thresholds, and installations whose duration nobody added up.

Research confirms that this effort weighs relatively more heavily on small businesses. But it is largely one-off. Anyone who clarifies and documents each new type of transaction properly once turns uncertainty into a routine.