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The Ultimate Guide to Permanent Establishment

The term used internationally to describe a foreign taxable business presence is ‘permanent establishment’. While permanent establishment criteria can be elusive for easy application to all forms of business, there are elements and definitions used in the majority of countries.  This guide will explore the traditional approach to permanent establishment, as well as modern developments due to the internet and forms of digital commerce.

1.    What is Permanent Establishment? 

2.    How are Permanent Establishments Taxed?

3.    OECD and Permanent Establishment: Differences Between Countries and Industries

4.    How to Anticipate Virtual Permanent Establishment and International Tax in the Digital Age?

5.    Global Mobility and Permanent Establishment

6.    US Permanent Establishment

7.    UK Permanent Establishment

8.    Employer of Record Solution


1.    What is Permanent Establishment?

a.  Permanent Establishment Definition

Permanent establishment (PE) is created by business activity that is sufficient for a corporation to be viewed as having a stable and ongoing presence in a foreign country. If the activity results in some type of locally created revenue, then the host country may impose corporate taxes at the local rate.  As the term implies, ‘permanent establishment’ will be triggered by a company’s activities that reflect ongoing and persistent revenue creation, rather than sporadic or isolated business efforts.

b.    How Does Permanent Establishment Work?

Every country has criteria that will define when business activity reaches a level that will trigger PE and resulting taxation.  The Organisation For Economic Cooperation and Development (OECD) is the leading international body that is defines some applications of PE.

Although the OECD does not have any legal power to set international standards, its member states often look to it for guidance in forming economic policies, treaties and tax laws.  For example, the OECD language on PE is commonly adopted in tax treaties between countries.

The standard criteria used in most countries for PE are:

  1. A fixed place of business, address, bank account or other physical presence
  1. Activity by employees in country that directly relates to revenue creation
  1. A sufficient time frame to trigger PE under local law or a tax treaty
  1. Actual control and direction of the employees’ activity by the parent company

c.     Types of Permanent Establishment

There are a few common types of permanent establishment to be aware of based on traditional approaches, although these are being modified as more business is conducted virtually over digital mediums.

Fixed Place of Business PE

The historical and easiest test of ‘permanent establishment’ is having a fixed place of business and can include:

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

Sales Agents

Employees that work as sales agents and have the authority to conclude contracts in the name of an enterprise may also be sufficient to create PE.  The determining 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 host country.

Service PE

The areas of service PE is 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.

d.    Examples of Permanent Establishment

Building and Construction Projects

Since building and construction projects are not “permanent” for the company,  the test for PE becomes more time-based.  Depending on the country or its tax treaties, the time period of construction activity may range from 6-12 months to trigger PE.

Because the nature of construction work involves site preparation phases, periods of work stoppage and sub-contracting, this can be a complex area to determine when exactly PE taxing rights will arise in the host country.

Services and Consulting Projects

Falling under the ‘services’ type of PE, consulting services or projects pose an interesting issue where there may not be any type of fixed place of business, typically required to create PE.  The analysis for services PE will revolve around the non-physical elements of permanent establishment, since there may be no office or branch in the country.

Types of Agency PE

If a company uses sales agents inside a country, this type of activity may trigger PE if the agents are concluding contracts on behalf of the company.  This qualifies for the ‘revenue creation’ element of PE, and those contracts would be subject to corporate tax if the activity is habitual and ongoing (rather than a single contract).

Digital Sales and e-Commerce

An emerging, but legally contested, area of PE is that of revenue created through digital or virtual means.  Major IT companies have escaped PE taxation based on traditional definitions, but now those criteria are being changed to adapt to the modern age of ecommerce.

d. Frequently Asked Questions About Permanent Establishment

There are a few questions that arise as a company starts to look at their business presence in a foreign country, most of which can be answered by looking at either the host country laws or tax treaties.

Can an employee create permanent establishment?

One of the typical ways that a country may assign PE to a foreign company is by the presence of employees working.  There is no hard, fast rule in this area, and will depend on factors such as the amount of time spent in the country and specific business activities performed.  Having a formal office or facility in the country will increase the likelihood of PE being created by employee activity.

Many jurisdictions use ‘revenue creation’ by employees as the test, which is a narrower approach than simple employee presence.

  • 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 becomes greater since virtually any activity could result in PE.

Using the ‘revenue creation’ model, here are some examples of where PE will likely be created by employee activity:

  • An engineer on the ground servicing a contract which results in revenue to the parent corporation
  • A sales representative that is regularly 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 a GEO employer of record

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

  • Activity that is strictly marketing related, such as early negotiation of sales contacts, attending trade shows, collecting information or otherwise testing the market
  • Providing consulting or advisory services that are temporary, such as on site IT support
  • Occasional contracts being concluded by third parties or agents
  • 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, or the revenue is traced to the host country

Can an individual have permanent establishment?

Permanent establishment only leads to corporate taxation, so an individual working such as a sole proprietor or independent contractor would not typically meet the criteria.  Some countries might impose an individual income tax for revenue earned, but that is distinct from PE.

Is a Wholly Owned Subsidiary a Permanent Establishment?

Generally, a wholly owned subsidiary that is incorporated would meet the ‘fixed place of business’ test for PE, even if the parent company is located abroad.  This is the highest level of commitment to a foreign market, and would usually entail some revenue creation leading to PE.

Difference Between Permanent Establishment and Subsidiary:  There is little difference since the subsidiary will be operating similar to a domestic company with full incorporation and registration.  If there is management control from the parent company this would strengthen the case for PE.

Is a Branch a Permanent Establishment?

Most branch offices would also meet the ‘fixed place of business’ test for PE if there are revenue creating activities.

Difference Between Permanent Establishment and Branch: A branch office could be in a country simply for customer service or sales, so it is possible a branch could avoid PE taxation.  It will depend on revenue creation activity.

Is a Partnership a Permanent Establishment?

For a partnership to trigger PE it would depend on the level of activity by the foreign partners compared to host country partners.  In the US, even foreign limited partnerships are deemed to have PE as a result of their US partner’s presence.

Is a Rental Property a Permanent Establishment?

Because rental properties are often passive investment, it is unlikely that alone would trigger PE, unless a foreign company had many properties in the location and were conducting a leasing business.

Is a Liaison Office a Permanent Establishment?

A liaison office is similar to a branch office, but may only be a point of contact in the country, with little or no revenue creation.  For example, collecting information advertising, and storage of goods are all insufficient to create PE.

e.     Permanent Establishment Risks

Do I Have a Permanent Establishment?

There is always a risk that business activity in a foreign country will result in PE and corporate tax.  The problem for many companies is that they may not even be aware that their presence is triggering PE, and they are then met with unexpected tax liabilities.

The only way to know if your company’s activities are triggering PE is to research host country tax law and any tax treaties with your home country.  By reviewing this guide, you may begin to know if your current or planned business activity will result in taxation, but experts should be consulted to review your specific situation.

How to Avoid Permanent Establishment Risks?

The best method for avoiding PE risks are to engage local partners or experts who can advise you on the host country laws.  Even if you trigger PE, then at least you will have planned for the taxes owed and can avoid the risk of any legal actions.

Another approach is to limit business activity to short business trips and avoid long assignments by employees.  This assumes there is no fixed place of business or facility, and you are solely engaged in marketing, sales or consulting.

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2.    How are Permanent Establishments Taxed?

a.    Permanent Establishment Tax Risk

When a business embarks on a global expansion plan, one of the core considerations is corporate taxation on foreign sourced revenue.  While a company will typically be taxed on profits in its home country, there may be additional taxes owed in other countries of business activity.  This could affect the net profitability of entering a new country, and should be part of an overall planning analysis.

Permanent Establishment = Corporate Tax 

The term ‘permanent establishment’ refers to activity by a multinational that creates a sufficient presence in a foreign country to make it liable for local corporate taxes or value added tax (VAT).  This law reflects the rights of countries to tax businesses that are generating revenue through local operations, even if they maintain their principle headquarters in the home country.

The reason this becomes important for planning purposes is that a company could be subject to ‘double taxation’ on profits, since the home country could tax those amounts as well.  Of, course there are tax treaties and foreign tax credits available that could lessen this burden, but it depends on the country of business activity and home country tax policies.

There are three main sources for PE definitions that lead to corporate tax, in order of priority:

  • Tax treaties between the home country of a multinational and the host country where business is conducted. The tax treaty may offer more lenient criteria for triggering PE or extend a lower corporate rate to treaty members.
  • The domestic tax law of each country that governs corporate tax. This would subject any PE activity to local corporate tax rules and rates.
  • OECD and UN Models: Member states could be guided by the models developed by the OECD and UN to determine when PE is created.  These models may be useful where a tax treaty does not contain reference to newer forms of revenue creation, such as ecommerce and cross border digital transactions.

When a company is entering a new market, each of these should be evaluated and activity monitored to anticipate potential tax liability.  If there is no tax treaty in place, then the host country’s laws will take priority over any international conventions.  This becomes important if a company is entering a developing country that is not an OECD member, and does not have a tax treaty with the home country.

Both the OECD and UN continue to offer guidance and model language for tax treaties in an attempt to create international consistency in the area of PE.  Neither of these models have any legal impact, except where the language has been formally adopted into a treaty.

Nonetheless, the models are valuable in gaining insight to non-traditional types of PE such as a ‘virtual’ presence in a country.  The OECD in particular is targeting what they term ‘artificial PE avoidance’ by multinationals on foreign-sourced income.

b.    Tax Treaty Permanent Establishment

There are over 3000 tax treaties in effect and many of them have PE clauses, which may be more lenient than domestic tax laws.  The reason is to encourage trade between treaty members without creating undue tax burdens for companies from either of the member countries.  The first step when entering a new market is to review any tax treaties, as well as any interpretations of specific cases or claims of PE under the treaty.

In addition to offering more relaxed PE criteria to treaty members, there may also be a lower tax rate for PE than for domestic corporations.

c.     What Are the Tax implications of Permanent Establishment?

Managing PE in Multiple Countries and Regions

One of the real challenges in tax planning and PE is that each country has the authority to create its own standards and criteria for PE.  This includes the rate of withholding and taxation, as well as factual elements that will lead to creating PE within national borders.  Because of this there is no reliable ‘general’ approach that will work to predict PE, although some global regions are beginning to target any revenue generated inside of a host country.

Some markets such as Europe are aggressive in pursuing PE claims and the associated revenue, and even tax treaties may not offer much relief.  Successful legal PE cases against large tech companies has emboldened European countries to continue this trend.

In Asia-Pacific, China as a popular business market has one of the broadest approaches to PE for foreign companies, but also has tax treaties with major trading partners that grant some relaxed criteria and tax rates.

Avoiding Double Taxation from the Host and Home Country

No company wants to pay double tax on its profits, and with proper planning this consequence can be avoided.  Some of the central issues include:

  • Is there a tax treaty that gives a company more lenient PE criteria?
  • If PE is created, what are the withholding and tax rates?
  • Does the company’s home country give tax credits to companies that pay tax in foreign countries?
  • Even if PE is not created, are there still business taxes and withholding to consider on gross payments from a host country source (as in China)

By looking to local corporate tax law and tax treaties, a company can begin to assess potential tax liability for its foreign operations.

What is the Effect of Using a GEO on PE Taxation?

Use of third party or outsourced employers in the host country such as a GEO, is one option that some multinationals use to try and avoid triggering PE via employee activity.  In essence, the GEO becomes the local employer of record for workers on assignment.  This is important because it is usually the activity of employees in the host country that will lead to PE, and the parent company may hope this will prevent PE taxation from reaching them as the true employer 

The protection is not certain however, and in most cases the client-company will still be controlling and directing the activity of its employees, while the GEO is simply filling the role of payroll and employment administration.

It may help if the parent company is not running its own DIY registered payroll, preventing an easy audit by authorities, but the GEO cannot fully insulate a foreign company from PE taxation.  This is even more true today where countries are actually trying to broaden the reach of PE taxation, rather than allowing tax avoidance based on outsourced local employment.

3.    OECD and Permanent Establishment: Differences Between Countries and Industries

The Organisation For Economic Cooperation and Development (OECD) is the leading international body that is defining new areas for application of PE, some of them controversial.  Although the OECD does not have any legal power to set international standards, its member states often look to it for guidance in forming economic policies, treaties and definitions.

How PE Will Be Applied in Different Industries and Types of Business Activity

The variety of PE-type business activities is illustrated in this overview of the OECD Model Tax Convention, covering farms, home offices, subcontracting and international shipping.  Despite its importance to foreign trade, PE remains a concept open to interpretation.  Each country continues to create its own definitions of PE, and when a company may have sufficient business activity to trigger local corporate taxation.

This is the core problem for businesses that are trying to understand when PE is created so that a company can make informed choices about business activity and potential taxation.  There are a few accepted baselines for PE, but those may become broader as ‘business activity’ can be interpreted in new ways.


As an example, the permanent establishment criteria in China are very broad and inclusive of most types of business activity that are used to create a PE.  China defines PE in four separate areas:

  • Fixed Place PE
  • Construction Site PE
  • Agent PE
  • Service PE

The agency and service PE definitions are especially problematic for some companies.  A reading of these various ways to create PE reveals a very broad application of the permanent establishment criteria, perhaps drafted by China to enfold as many scenarios as possible that would lead to taxation.


China seems to be the most focused country in Asia when it comes to PE enforcement, but Europe continues to be the region where countries are most aggressive in pursuing PE all types of claims against foreign companies.  For example, the PE law in Luxembourg is triggered if a foreign company simply has a permanent representative there, and a fixed premises as the headquarters.  There is no revenue creation requirement.

Notably, France, Italy and Spain have all won recent PE disputes, which are encouraging other European countries to raise permanent establishment challenges, especially in the area of virtual business activity.

Realistically, a country attempting to attract investment and business activity might take a more relaxed attitude toward PE, while a country with an established history of foreign investment may be stricter in the application of corporate tax rules.

Examples of Time Threshold Requirements

The other key element used to trigger PE is the amount of time spent doing business in the country.  This factor is in place to prevent taxation of businesses that have sporadic or exploratory activity in a country.  However, even this requirement is becoming more relaxed as countries realize that revenue creating activity can take place in short visits rather than only with a continual presence.

As an example, China recently changed its calculation of the time required for the ‘permanent’ element of PE, from a simple six months of continual activity to the newer ‘aggregate’ method of 183 days within 12 months.  This approach captures more business activity as ‘permanent’, even where employees may be coming and going from the country using short term business visas.

How Tax Treaties May Affect the PE Time Threshold

Tax treaties between trading partners are designed to lessen the burden on companies doing business across borders.  Most historical trading partners will have some type of tax treaty that deals with PE, and can define the time period required.

The PE time threshold is often less stringent and more ‘business friendly” in a tax treaty than under local laws, to encourage trade between treaty members, and limit unnecessary corporate taxation.  One issue to be aware of is whether the tax treaty allows for the ‘aggregate’ method, continual time method or both.  It is possible to avoid PE time thresholds if the activity straddles two separate tax years, a strategy employed by some companies.

Tax Treaty Specific Examples

Construction Projects

review of several tax treaties with respect to construction sites shows that only continual activity exceeding six months will result in PE for most countries that have a treaty with a trading partner.

Consulting Services

However, for on-site services, the tax treaty between the US and South Africa is one example of creating PE when consulting or other services occur 183 days within a 12 month period (the tax year).   This treaty is far from conclusive and there have been a number of court cases involving services PE, with the outcome depending on the type of service, time spent and degree of interaction.

Agents and Brokers

However, in the case of China and other countries, the use of independent (non-employee) agents or brokers would not create an agency PE.  The agent must be representing other companies and generally not be subject to control by the foreign company to avoid PE.  If the agent is authorized to actually sign contracts for the company, then PE might be created by that type of activity, regardless of the amount of time spent in the country.

4.    How to Anticipate Virtual Permanent Establishment and International Tax in the Digital Age?

The traditional definitions of permanent establishment, which require both physical presence and employee activity inside a country, are being changed in the digital age.  New criteria are being applied to e-commerce companies based on a virtual presence that nonetheless generates revenue from a foreign country.

This trend should also be of interest to all international businesses that believe they can avoid PE through limited time or exposure in a country, since their employees may still be communicating and transacting business over virtual mediums sufficient to meet new PE standards.  This may be the wave of the future, as the business “nexus” tests are expanded to create permanent establishment based solely on revenue, rather than physical offices or in-country staff.

Companies are now forced to anticipate when certain types of virtual or electronic activity will trigger a Virtual Permanent Establishment in a specific country.  Specifically, online retailers, internet advertising, app stores and media sites can all generate revenue in a country without any type of physical presence.  Going forward, ‘revenue’ may become the primary test for PE in the digital age.

a.    OECD Guidance and Commentary on the Challenges of the Digital Age

The Organization for Economic Cooperation and Development is the international body that has taken the lead on expanding PE definitions to include e-commerce under ‘virtual permanent establishment’.  The OECD uses examples of foreign companies with a “significant digital presence” to recommend establishing PE in the following areas:

The use and sale of data, such as news media through aggregators such as Google News. Aggregators affect readership of local publications, take a market share from news sources, and could be taxed on that basis even though the aggregator service is free to readers.

Online sales of goods and services into a foreign market, including tangible products, media or other digital products. Since these e-commerce sales are paid for from a foreign source, this would meet the accepted criteria for PE of “concluding contracts” inside a country of business, as a virtual PE agency.

Housing servers, hosting websites and other minimal facilities that still generate revenue in the country. Depending on bandwidth and market share, digital exchanges could be enough to establish a ‘physical presence’ in the country.

b.    Tax Treaties on Virtual Commerce

Many countries will have a tax treaty with a trading partner that also defines PE for companies from each member country.  Some of the OECD recommendations could begin to show up in tax treaties as governments reach a mutual agreement to expand the application of PE to capture e-commerce businesses.  The OECD is promoting revisions of the PE definitions in many tax treaties to prevent ‘PE avoidance’ tactics. (page 19, Action 6)

c.     Host Country Laws on Virtual Permanent Establishment and Digital Sales

Whether originating from a tax treaty or host country tax laws, PE criteria that include digital sales could result in unexpected corporate taxation for those types of transactions.  In some cases, e-commerce companies do not anticipate the cost of tax for these transactions, and are forced to either withdraw from the country or re-examine their pricing and business models.

d. Withholding and Taxation on Digital Transactions

Permanent Establishment, VAT or Business Tax

Digital sales and e-commerce could be taxed via corporate tax, VAT or a host country business tax on locally sourced revenue.  What this means is that if a sale or transaction fails to qualify under the PE rules, the host country can still withhold a business tax on any payments made locally.

China withholds a 5-10% business tax on payments from Chinese companies and VAT taxes are being expanded in Europe to capture digital sales.  If a company triggers PE, then that tax is often the same as the host country corporate income tax, and based on net profits.

Withholding Rates and Methods

The withholding rates for PE related revenue depend on the host country corporate tax rates.  However, there are new laws being passed that could actually result in a higher tax rate for e-commerce and digital sales, such as the so-called “Google Tax” in the UK.

That measure imposes a 25% rate on e-commerce, compared to the domestic corporate tax rate of 21%.  The UK government decided to sidestep the complex PE rules and simply impose a different type of (higher) tax on tech companies that make money through virtual means.

While the UK has reached settlement with Google for owed back taxes, France is now stepping forward with a similar claim that is ten times more than Google paid to the UK.

Host Country Permanent Establishment Tax Claims and Cases

Countries in some regions have become aggressive in pursuing PE tax claims against e-commerce businesses based on changes in local corporate tax laws or tax treaties.  In a case in Spain, a court in that country determined that Dell Computer had a “virtual permanent establishment” due to sales made in Spain, and the use of a Spanish affiliate to administer their website.  This was sufficient to create a “nexus” of business activity under a tax treaty between Spain and Ireland, where the company was headquartered and servers located.

Similar cases and pending claims are being seen in other European countries, India and Israel, all of which are targeting PE avoidance tactics to avoid local taxation.

Tax Strategies for E-commerce:  How to Anticipate Permanent Establishment

Any e-commerce business with revenue from foreign sources can use a multi-step method to anticipate potential PE claims for taxation:

Research Applicable Tax Treaties

The first step is to review any tax treaties between the home and host countries for any PE criteria that could include electronic transactions or digital sales.  Also, any court cases or claims stemming from application of treaty PE clauses to e-commerce will give clues how the country will use the treaty to include digital transactions.

Host Country Laws

If there is no tax treaty, then the corporate tax laws of the host country will determine whether a company falls under local PE rules.  Those laws are most susceptible to changes, which could encompass any type of e-commerce, and present the most risk to a company that generates revenue in a foreign country.

Regional Enforcement of Permanent Establishment

Even if the host country does not have specific e-commerce standards for PE taxation, regional forces and agreements could spur investigations and audits into any company generating local revenue.  For example, the European Commission is proposing a measure to force large tech companies to begin disclosing their earnings and taxes in each country on the continent, opening the door to further scrutiny of tax avoidance strategies that include skirting permanent establishment rules.

5.    Global Mobility and Permanent Establishment

a.    Global Mobility and Permanent Establishment Risk

The era of global mobility across international borders has brought attention to undefined areas of business activity, which may or may not create PE in a foreign country.  Those areas include short term or sporadic business activity, agents, subcontractors and secondment arrangements.  For companies that rely on this type of activity it is useful to consider when PE could possibly be created, to avoid unintended corporate tax liability.

A Mobility PE Definition: Occasional Visits vs. “Habitual” Activity

One of the most common characteristics of global mobility is the use of workers for brief projects in a country, that do not rely on an office site or other physical facility.  This could include consulting work, customer service, installation projects, marketing visits or sales calls.

The criteria used most often to create PE for this type of short term business is ongoing and “habitual”, rather than a one visit or sporadic activity in the host country.  For example, if regular customer service or consulting is delivered from a local fixed office, then that would meet both the ‘habitual’ and fixed place of business requirements for PE.  But, a one time or occasional visit for repairs or training would lack the element of ongoing activity.

Infrequent client visits or special projects would also probably be insufficient to meet the PE definition.  Installing computer hardware in a country for a limited time would not create PE, even though the company is paid for the work conducted inside the country.  Most countries wont impose PE unless the project exceeds six months, either continual or accrued during the tax year.

Agency PE – Making Sales Calls and Concluding Contracts

The most common use of agency in business is for sales calls.  Since many brief visits to a country could be for sales related activity, there is a question of when a sales agent can trigger PE on behalf of a company.  In general, if the broker or agent is an independent contractor with multiple clients, and only facilitates occasional sales for a single company, then it is unlikely PE will be created.

However, if an agent is concluding many contracts in a single country for one company, this would probably fit the “habitual” definition, and PE could be created.   In this instance, the agent is likely to be seen as an employee as well, solidifying the case for PE.  The key element seems to be having the authority to actually finalize the contract, which is a measurable and direct creation of revenue in the country, and therefore taxable to the company.

Some countries are even attempting to impose PE for sales that are concluded without an actual agent, stretching this definition to include virtual or digital sales.

Subcontractors and PE

PE based on services is often triggered by a time element, such as six months or a year of continual activity to meet the “presence” test in the host country.  This would apply to construction projects that have a work timeline of finite duration, or that may occur over multiple time periods allowing for work stoppage.

Construction and installation projects frequently make use of host country subcontractors to perform part of the work, but this will not insulate a company from PE.  If a foreign company is using local subcontractors and directing their work, then the time spent by the subcontractors would be attributed to the company as general contractor for PE purposes.  

Foreign subcontractors would be subject to the same PE criteria as any company, and would not be shielded from taxation simply because there is a general contractor in charge of the overall project.  But, the general contractors overall project time will not attach to the subcontractor to create their distinct PE tax liability.

Secondment Arrangements

The use of secondment arrangements brings up PE issues for companies with global mobility programs that send employees abroad to work for a local affiliate or entity.  For true affiliates, there is probably no real distinction since the parent company would continue to direct the employment and work product in the host country.  This would include the ability to terminate the employment contract, and control conditions of employment, so the employee’s activity would have the potential to create PE, if other PE conditions were met.

However, in some cases the host country entity will bear the risk and direct control over the employee, which would serve to create sufficient separation between the worker and parent company to avoid PE.  This is the standard used in some tax treaties such as that between China and the US.  As always, the question becomes what facts and circumstances constitute control over an employee.

As an alternative, a company might use a third party employer, such as a FESCO in China or Global Employment Organization (GEO) to act as local employer of record.  The question is whether the use of a FESCO or GEO to outsource employee hiring has an impact on the creation of PE by the corporate employer. 

Although the GEO solution does create a separate legal employment relationship, it is not certain that will shield the company from PE tax liability.  If a country has a strict approach to PE, they may still look to issues of control and direction of the employee’s activity to establish PE under local criteria.

b.    Doing Business Globally and Creation of Permanent Establishment: What Multinationals Need to Know

How Tax Treaties and Domestic Tax Law Affect Determination of Permanent Establishment

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 discussed, 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.

c.     Global Employment Company 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 in the host country. 

The question is whether the use of a GEO to outsource employment has an impact on the creation of PE by the corporate client-employer.  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. 

6.    US Permanent Establishment

US Permanent Establishment Definition

U.S. tax treaties define a permanent establishment as a “fixed place of business through which the business of an enterprise is wholly or partly carried on”.

Permanent Establishment US Tax Law

The IRS will impose corporate tax on foreign companies that meet the PE criteria.  To avoid any penalties or back payments, a company should file IRS Form 8833 as a proactive claim on any treaty benefits with the US.

Permanent Establishment Rules in US

The US tax code defines PE along the lines of the OECD Model language, and is subject to interpretation.  Auxiliary or preparatory activity will not trigger PE, and other exceptions to apply to limited business activity.

US Permanent Establishment Checklist

  • Determine if your home country has a tax treaty with the US
  • Research the applicable PE criteria under the treaty
  • If there is no treaty, look to US corporate tax law for guidance
  • File a US tax return and Form 8833 to claim any treaty exemptions or rates
  • Research tax credits that may be available in your home country to avoid double taxation of profits

7.    UK Permanent Establishment

UK Permanent Establishment Definition

In the UK PE is defined as where a company has a presence to carry out trade, and there are two primary types:

  • A fixed place of business, such as an office, a factory or shop
  • A dependent agent, concluding contracts on behalf of the non-resident company

According to the UK government website: Many different elements contribute to a multinational’s economic activity, including sales, employees, technology, physical assets and intellectual property. The tax authorities need to work out which of these are developed or take place in a particular country and how much profit is attributable to them. Simply having customers in the UK does not mean that a company is carrying out its economic activity here. This is because having UK customers is not the same as having a permanent establishment in the UK. There is a difference between a non-resident company that is trading from abroad with customers in the UK, and one that is actually trading in the UK.”

However, this lenient position is being put to the test as tech giants such as Google manage to pay a fraction of corporate tax, claiming they have no PE under UK criteria.  But this could be changing soon, as the Brexit is generating some changes in tax and business policy.

UK Permanent Establishment HMRC

HRMC is the UK tax authority that will determine if a company’s activity is sufficient to trigger PE.  Those criteria may be expanding significantly, and the UK may impose corporate tax on any income created inside the borders, regardless of a business presence.   This would effectively do away with PE limitations, and simply impose tax on any revenue.

UK Permanent Establishment Checklist

  • Determine if your home country has a tax treaty with the UK
  • Research the applicable PE criteria under the treaty
  • If there is no treaty, look to UK corporate tax law for guidance
  • Research new developments that could lead to broad based corporate income tax for non-resident companies.
  • Research tax credits that may be available in your home country to avoid double taxation of profits

8.    Employer of Record Solution

Companies that are engaged in business activity in foreign countries should consider an employer of record solution with Shield GEO.  In some cases, the GEO could provide a layer of separation between the non-resident company and employees on short term assignments.

This is not the only reason to use an employer of record solution, since there are many complexities involved with setting up branch offices and assigning employees abroad.  There are additional significant benefits to using Shield GEO including:

  • Compliance with all immigration and work permit requirements
  • Running a local payroll through one of our established partners in the host country
  • Avoiding the need for local incorporation and registration, since the employer of record takes that role for assignees
  • Correct statutory withholding for tax, social security and other mandated payments
  • Access to a network of local partners and experts to ensure legal compliance at every stage

 Need more information about employing in a new country? Learn more about:

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