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Fixed Place of Business: What Multinationals Need to Know

For a multinational company operating in a foreign country, one of the primary issues to consider is the creation of “permanent establishment” (PE).  PE is created by business activity’ that is sufficient for the corporation to be viewed as having a stable and ongoing presence in the country, and resulting in some type of locally created revenue. But the definition of permanent establishment can vary by country and is also often open to interpretation. This article will explain PE and how it is commonly regulated.  The primary elements and tests that are used to determine when a PE is created include:

  • A fixed place of business and sufficient employee activity
  • Ongoing business activity for a period of time
  • Actual revenue creation within the country
  • Meeting definitions of PE within specific tax treaties or according to local tax laws

The importance of PE to a corporation is the fact that PE gives rise to taxing rights by the country where the business activity takes place.  If PE is triggered then the foreign enterprise is taxed similar to a domestic corporation, since the revenue is created from sales and services that occur within the country’s borders.

What Are the Elements of Business Activity in a Country That Might Trigger Permanent Establishment?

The Role of the OECD in Defining Permanent Establishment Guidelines for Member States

The Organisation For Economic Cooperation And Development (OECD) has been instrumental in setting ongoing guidelines for what constitutes PE through commentary and revision of the OECD Model Tax Convention.  While it remains a grey area, the creation of PE may arise when there are several physical elements in place.

The language of Article 5 from the OECD Model Tax Convention has been adopted by many countries to define PE for the following specific types of business activity.

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Fixed Place of Business

The term ‘permanent establishment’ means a fixed place of business and can include:

  • A branch
  • An office
  • A factory
  • A workshop
  • A mine, or gas/oil well

Sales Agents

According to the OECD Model, sales agents that have the authority to conclude contracts in the name of an enterprise will also be sufficient to create PE.  The requirement is that the authority must be exercised habitually, rather than once or twice.  Also, the majority of the negotiation, drafting and signing of contracts must have occurred in the local country.

Service and Agency Permanent Establishment

The areas of service and agency PE are expanding in scope and can include situations such as providing technical or managerial services in country.  Even some ‘back office services’ may trigger PE in certain countries.

Each country defines ‘services’ differently for purposes of creating PE, and some may include supervisory services where others do not.  This is the core problem for businesses that are trying to understand when PE is created, and clear guidelines are not easily found that work in every country.

How Tax Treaties and Domestic Tax Law Affect Determination of a Fixed Place of Business

All of these variables make it difficult to arrive at one international model for every business type, and companies are often left to look at the specific country of business activity for guidance.  In some cases, there will be a tax treaty in place between two countries that define PE, or else the creation of PE will be determined by a country’s domestic tax code.

The China Example

For example, a company that is doing business in China would be subject to its Corporate Income Tax (CIT) at a rate of 25% for all revenue created in China.  There would be an exemption from the tax for any business from a country with a tax treaty or Double Taxation Agreement (DTA) with China, as long as there was no evidence of a permanent establishment.

Business Guidelines for Permanent Establishment

When a business is entering a foreign market it needs some guidelines to know the type of business activity that will trigger PE.  As outlined, the creation of PE is a confluence of factors rather than just one element standing alone.  The type of business presence, employee activity, agency relationships and time spent in country will all factor into the outcome.

The simplest approach is for a company considering moving into a foreign market to answer a few basic questions:

Q.)  Is there a tax treaty between the company’s home country and the foreign jurisdiction?

-If yes, then the language and definitions in the tax treaty need to be analyzed and understood completely prior to entering the market.  Those definitions will control whether PE is created by specific activities for businesses in either country.

-If no, then the foreign country’s domestic tax code would control the definition of PE, and is probably less favorable for the company entering the country.

Q.)  Does the ‘fixed place of business’ definition being used go beyond the traditional office and factory sites to include constructions sites, agency relationships or service contracts?

-If yes, then the scope of application of those agency and service activities need to be studied with specific case examples of when PE is created.

-If no, then only traditional physical sites would qualify as a ‘fixed place of business’.

Q.)  What types of employee activity are required to create PE in the new country?

-If PE is only created by standard revenue creation, then activities like marketing, temporary sales activity and arms length transactions would likely not trigger PE.

-If PE is created by a broader definition of employee actions, then the likelihood of PE is greater.

Q.)  Is the PE requirement of ‘permanence’ created by a standard continuous presence in the country for a period of time? ( ex: six months)

-If yes, then that time frame would be the clear cut-off for triggering PE with the identified business activity.  Any time spent that was less would not create PE.

-If no, then the use of a ‘China-model’ aggregate number of days within a year makes the calculation more complex, and it is easier to trigger PE without intending to.

A Look at Outsourcing: The Global Employment Organization and Permanent Establishment

The use of a Global Employment Organization (GEO) such as Shield GEO, is one option for managing global employees, where the GEO for a multinational company actually becomes the employer of record for its client’s employees.

The question is whether the use of a GEO to outsource employee hiring has an impact on the creation of PE by the corporate employer.  For example, although a Professional Employer Organization (GEO) provides hiring and payroll services as the employer of record, the GEO may still be seen as ‘agent’ of the parent company, which would not prevent creating PE.

While there is no conclusive example, it does appear that the criteria for PE would still depend on the employee’s activities, rather than the use of a GEO.  In other words, the use of a GEO would probably be insufficient to shield the corporation from PE if the other PE-creating elements were in place.  The PEO might simply be seen as a co-employer with the company.

PE or no PE? – Specific Examples

Examples of where Permanent Establishment will likely be created include:

  • An engineer on the ground servicing a contract which results in revenue to the parent corporation
  • A sales representative that is concluding contracts on behalf of the company
  • Customer service representatives that staff a fixed office and attend to client needs
  • Most situations where there is management control by the parent company and not the GEO, and where revenue is created

A few specific examples of employee activity that will likely NOT create Permanent Establishment are:

  • Activity that is strictly marketing related, such as early sales contacts, attending trade shows or otherwise testing the market
  • Providing consulting or advisory services that are temporary, such as on site IT support
  • Contracts being concluded by third parties on occasion
  • Services performed by independent contractors are less likely to trigger PE
  • Sales transacted strictly over a website, unless the server is physically located in country


Any company that is looking to expand into new a new market will need to assess its exposure to taxation through permanent establishment.  Many of the factors involved depend on the country and specific business activity.  If you are concerned about the issues surrounding Fixed Place of Business we are available at Shield GEO to discuss your specific scenario at any time and what steps you can take to minimize the tax risks.

Get in touch to find out more about how an Employer of Record solution can help your company

The information in this article is subject to changes in local legislation.

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