A Guide to Permanent Establishment Risks – And How to Avoid Them
Don’t pay more tax than you need to – stay vigilant towards these Permanent Establishment risks when operating globally
Alex Schulte | 16 July 2024
If you do any business outside of your home country, there are two words you need to always keep in mind: Permanent Establishment. A Permanent Establishment (PE) is one of the most important concepts in global tax law. But unless you’re a legal professional or an accountant, it’s possible that you will never have heard of it.
What is Permanent Establishment?
Permanent Establishment refers to a fixed place of business in an overseas jurisdiction where an enterprise’s activities are carried out, either wholly or in part. This is the threshold used to determine whether a company has a taxable presence in that jurisdiction. If your operations in another country lead the authorities to determine that you qualify for a Permanent Establishment, you will become liable for tax on profits made in that country.
What Triggers a Permanent Establishment?
There are several criteria for identifying a Permanent Establishment.
1. Fixed Place of Business
Maintaining a fixed location in another country for conducting business is the primary source of Permanent Establishment risk. This must be a location ‘at the disposal’ of that enterprise, i.e. one over which the business exercises control. That clause is good news for any companies who hire remote workers overseas – a home office is unlikely to qualify. It will, however, cover the following setups:
- Offices
- Branches
- Factories
- Workshops
- Resource extraction sites
- Construction or engineering projects that last longer than six months
2. Dependent Agents
The actions of dependent agents – individuals or entities acting on behalf of a business who exercise the authority to sign contracts in its name – can also trigger a PE. This will normally depend on whether this authority is exercised habitually and regularly.
3. Providing Services
According to the UN’s Model Tax Convention, companies can establish a PE by providing services in another country for a long enough period of time – typically six months.
4. Business Activity
The activity carried out at the place of business, by the agent or through the services rendered, must be substantial. Preparatory or auxiliary works like storage, display or purchase of goods do not qualify as Permanent Establishment risks.
5. Permanence
A PE will not be triggered if the activities taking place can be proven to be on a temporary basis. The threshold for this is normally six months, with the exception of recurrent activities or those taking place exclusively in that country.
What Would a Permanent Establishment Mean For Me?
If your business is found to maintain a Permanent Establishment in another country, there are several implications.
Tax Liabilities
A profit attribution exercise will take place, with any profits that result from the PE taxed at that jurisdiction’s corporate tax rate.
Compliance and Audit Risks
Authorities scrutinise companies with Permanent Establishments more closely. This means that businesses must invest in their compliance efforts and avoid slip-ups like incorrectly filing tax returns.
Reputational Risk
Companies that violate tax law, even accidentally, can pay a heavy price in terms of perception. Clients and customers may be less willing to deal with you, prospective employees might give you a wide berth, and authorities may impose a more stringent monitoring regime.
How Would I Accidentally Trigger a Permanent Establishment?
PE is a broadly defined concept, and many companies court Permanent Establishment risks every day without necessarily knowing it If your employees regularly visit or conduct business on your behalf in another country, you may be liable for a PE. The same is true if project-based work overruns beyond the six-month threshold. Companies that render technical or consultancy services abroad also run a Permanent Establishment risk.
How Can I Mitigate Permanent Establishment Risks?
For companies with a significant presence and extensive investments in other nations, a PE is just part of doing business. But if your roots in other territories don’t run so deep, you may be able to avoid this extra tax burden. You must always remain mindful of the risk factors that might trigger a Permanent Establishment, and take steps to mitigate them. This requires a careful and strategic approach to your international operations. We’d start with the following steps:
1. Keep Tabs on Overseas Assignments
If you send employees abroad, you need to ensure that they don’t stay longer than six months. You should also inform them that they are not to conduct substantial business activities beyond preparatory or auxiliary work. The same goes for any third-party intermediary agents you hire. It should be noted that sending people with ‘sales’ in their job description abroad will increase your PE risk.
2. Keep robust records
You should maintain scrupulous records of your activities in other countries. If your company’s status is ever questioned by foreign authorities, your record books are your best way of proving that nothing about your operations would trigger a PE.
3. Review Your Overseas Operations
It’s unlikely that your company would be running an office in another country without your knowledge. But is there any chance that your use of third-party companies in other countries might tip you over the line of Permanent Establishment? This is the time to review your documents and contracts to make sure they don’t contain any nasty, non-compliant surprises.
4. Research PE Regulations
Countries can differ in their definitions of what constitutes a Permanent Establishment. Before commencing any work abroad, make sure you’re familiar with the lay of the land in that location. If you need to know the finer details of tax, legal and compliance regulations for any country, Centuro Global’s AI-powered platform puts it all at your fingertips. Wherever you want to operate, come prepared with instant, carefully vetted information. If you want to see how it works, try it out for yourself here.
