Permanent establishment risk factors

In the March newsletter, we presented a high-level overview of both worldwide and territorial corporate tax systems. In this article, we consider how the physical presence of employees in a host country can cause the employer and the employees to be taxable in the host country, even in the case of short-term mobility assignments.

Many areas of potential risk are involved when employees travel outside their home country on business, whether for a short-term assignment or a long-term rotation.

In addition, employer-related corporate tax risks arise in a global mobility context.

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Of course, many global companies have established extensive business operations abroad and legitimately have income tax liabilities in those countries. While this is the OECD Model Treaty definition, a broad range of variations exists in the more than 3, bilateral income tax treaties. These domestic laws frequently are more onerous than a Treaty definition of a PE might be, under equivalent economic circumstances. US domestic law, for example, is more onerous than the typical tax treaty PE concept.

This can more readily create US corporate income tax exposure if a foreign employer based in a non-treaty country sends employees to the US. In the context of global mobility, this means that even the short-term activities of an employee, or a group of employees, can have the effect of creating a Permanent Establishment in the host country.

Once that happens, the income generated by the employer that is connected with the activities of the employee s is subject to corporate income tax in the host country. In these situations, employment of the individual typically remains with the home country and has not been shifted to the payroll of a host country subsidiary. Judith, a sales executive with Global Exports, travels to Germany on business from time to time.

Occasionally, Judith will negotiate and sign a supply agreement with a German customer of Global Exports. The article states, in relevant part:. Notice the underlined language. Judith, an employee of Global Exports, has to have the authority to conclude contracts in the name of Global Exports, AND must exercise this authority "habitually", before her sales activities will create a PE.

What does "habitually" mean?

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Usually this term is interpreted to mean "on a regular and continuous basis. Circumstances that might not create a PE under one treaty could create a PE under a different treaty.When doing business in international markets, you may find yourself traveling to countries in which you have no legal entity to negotiate agreements, find suppliers, or other business activities.

However, that is not always the case. Making business deals without having a legal entity can lead to Permanent Establishment PE risk. Gain a better understanding of permanent establishment and the hurdles that may come along with it. What makes permanent establishment a risk?

Sometimes, the short-term activities of an employee in a foreign country can trigger permanent establishment unintentionally. When a business has permanent establishment in a country, the income of the business and employees working there becomes taxable in that country. Without permanent establishment, the business and employees would not be taxed. To understand if your business requires permanent establishment, begin by asking yourself these questions:. When your employees go to a country, do they work together at a fixed location?

Having a regular, fixed site to which the employees return is one component of permanent establishment. Is the facility you use at your disposal when you work there? This does not have to be a place that only your company uses.

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It could be a co-working space or an office that you rent for the time you are in-country. Do you conduct the business of your company from that space? The kind of business that your company conducts is an important aspect of permanent establishment. Generally, companies are exempt from PE if the activities are short-term and not habitual. Are your employees seconded to a business in the country? In some instances, seconded employees, or employees temporarily assigned to work, can create PE for their home company.

The IRS of the United States dedicates a lengthy publication to addressing how this question plays out. Every international income tax treaty is different. This means that every country has a different standard for whether a business implements permanent establishment. To truly mitigate your risk, partner with a global expert. Working with an organization that has experience in global compliance and regulations can help guide you through the process of understanding international agreements so you can avoid unexpected tax liability.

There are many risks involved with global growth and overseas compliance, especially when trying to navigate legalities and labor laws. Hello VelocityGlobal. What Is Permanent Establishment Risk? Checklist for Permanent Establishment Risk To understand if your business requires permanent establishment, begin by asking yourself these questions: When your employees go to a country, do they work together at a fixed location? All rights reserved.If a company is determined to be a fixed place of business, any revenue earned inside that country qualifies to be taxed accordingly based on local tax statutes and the amount of time the company is active as a permanent establishment.

Not every business activity undertaken in a foreign country activates a permanent establishment designation. Consequently, permanent establishment risk forces a company operating overseas to measure its tax liability, so it can accurately gauge its tax obligations and stay in compliance within a country where it trades commercially.

How to Avoid Permanent Establishment Risk

Work with a local tax specialist. Getting good tax advice beforehand from a local tax agency or accountant lets you know where your company stands, and you can act accordingly. A reliable corporate tax advisor can aid in reviewing any service contracts with employees and local business partners, provide guidance on local tax liabilities, and generally protect your company from any major tax obligations linked to permanent establishment risk vulnerabilities.

Subsidiary status has its advantages, tax-wise. A foreign subsidiary operates independently from its parent company, is responsible for its own assets and liabilities, and is deemed to be a separate legal entity for taxation and regulatory oversight by the subsidiary where the company is established—taking permanent establishment risk out of the equation.

Is your company worried about the risks involved with paying foreign contractors? Learn about the challenges of international payroll processing and the best services and strategies for loc Subscribe to get the latest insights on global workforce management and trends. We talked with global HR leaders about the trends they're keeping top of mind in Here's what we learned. Safeguard Global does not use SolarWinds products within our infrastructure, and we can confirm that our payroll partners do not use the affected versions of SolarWinds products.

Co-employment can be a compliance risk to companies looking to hire international workers. How can EU citizens work in the U. By complying with new visa requirements. Learn more about these regulations as well as an alternative for hiring EU talent in a post-Brexit world. A global employment solution enables you to hire the talent you need, from anywhere around the world, without having to first establish a local entity.

A remote-first culture offers companies the opportunity to recruit and hire the best talent for their needs, from virtually anywhere in the world.

When hiring internationally, understanding local labor laws goes a long way in protecting an organization from fixed-term employment contract risk. Converting from contractor to employee can help your organization protect valuable global talent and avoid compliance risks like employment misclassification.

International employee leasing can help companies secure talent in new global markets quickly, compliantly and without the need for establishing a local legal entity. Understanding the advantages and the risks, plus how to protect your organization with an alternative solution.Permanent establishment risk affects companies who engage in business overseas.

The risk of creating a permanent establishment is a key risk area for multinational companies. VAT value-added tax is a tax concept that varies from country to country and is paid at every point in the supply chain. Permanent establishment risk is the risk of a local tax authority in a foreign country determining that your business has permanent establishment — a stable and ongoing presence in that country.

Making this determination can then allow that foreign tax authority to declare the business a permanent establishment, which makes that business liable for corporate taxes on profits generated in the country. In addition, the local tax authorities — depending on the country — can charge interest on unpaid taxes. Two main factors determine permanent establishment risk: the fixed place of business test and the dependent agent test. The fixed place of business test states that a business has permanent establishment in another country if it has a fixed place of business there through which it carries on its business in that country or elsewhere.

If your company operates from a specific location overseas on a continuous — or even regular recurring — basis, it could be deemed to have a fixed place of business. For example, if your freelancers receive mail on behalf of your business, there is a risk that your company could be considered a permanent establishment. Many companies have some activities or operations aboard without setting up corporate entities in those foreign countries.

For example, a business might:. Depending on the country and the circumstances, these activities may be enough to cause a significant risk. If any of those persons generates sales or profits, it could lead local tax authorities to investigate further.

If those assistance or support visits are determined to be long-term and not sporadicthen it could be enough to lead permanent establishment.

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As stated above, mismanaging your permanent establishment risk can lead to tax liabilities — including penalties and interest charges. One way to mitigate permanent establishment risk is to use a PEO or an employer of record to report taxes in local areas that you do business or hire freelancers.

Another way to mitigate this risk is to have clear documentation of your independent contractor relationship. Using a system like Liquidthat was designed for independent contractor and freelancer management, has built-in features and protections to help you with the behavioral, financial, and relationship factors that affect independent contractor compliance — both domestically and internationally.

Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Get the latest insights and news on the liquid workforce. Complete vendor and contractor management.

Learn More. Skip to content. January 21, We power the liquid workforce. Get Started. Leave a Comment Cancel Reply Your email address will not be published. Email Address.Many businesses with cross border operations but lacking a branch network or overseas subsidiaries in those jurisdictions rely on their globally mobile employees to maintain relationships with their overseas customer bases.

These practices may have developed over a number of years in line with the growth of the business and frequently without any consideration being given to the potential tax consequences of such assignments. Where such employees are regularly conducting business in other jurisdictions, and particularly where contracts are being concluded with customers in those jurisdictions, there is a risk of the business creating a permanent establishment and thus becoming liable to local taxes.

Such activities have been subject to greater scrutiny from tax authorities in recent years and in view of base erosion and profit shifting BEPS Action 7, this attention is only likely to increase in the future. This briefing will consider some of the ways in which globally mobile employees may create a permanent establishment. If a non-UK resident company has a UK permanent establishment, then the profits of the business that are attributable to that permanent establishment are chargeable to UK Corporation Tax.

The most likely situation in which a globally mobile employee can create a permanent establishment in another jurisdiction is where the employee is deemed to be a dependent agent acting on behalf of the company. Most fixed place of business permanent establishments will arise where a business has a clearly identifiable base of operations such as a branch or office. However, the absence of these traditional bases of operations does not completely remove the risk of creating a UK permanent establishment through a fixed place of business.

Organisation for Economic Co-operation OECD proposals published in and a number of non-UK cases have highlighted the possibility that an individual who works from home can be deemed to be working from a fixed place of business. HMRC commentary suggests that no fixed place of business permanent establishment would be created if a non-UK resident company employs sales staff in the UK who simply travel around from their private residences to seek orders.

permanent establishment risk factors

However, these scenarios can be very fact specific so they should be considered on a case by case basis. In the event that the employee does create a fixed place of business permanent establishment through home working, it may also be possible to apply the exception from creating a fixed place of business permanent establishment where the activities carried out by the employee are preparatory or auxiliary in relation to the business of the company as a whole.

In addition to the corporation tax consequences of having a UK permanent establishment, the income of the employees of the permanent establishment will also be subject to UK income tax and NICs from the first day of the existence of the permanent establishment.

The permanent establishment rules in many jurisdictions reflect the OECD guidelines and thus are broadly similar to the UK rules. However, in other jurisdictions there may be significant local differences or there may be no legal definition of a permanent establishment. As such it is imperative that companies with employees who regularly work outside of the UK should obtain appropriate local advice in order to manage permanent establishment risks.

Permanent establishment risks arising from globally mobile employees. A permanent establishment of a non-UK resident company exists in the UK if: the non-UK resident company has a fixed UK place of business through which its business is wholly or partly carried on; or an agent acting for the non-UK resident company has, and habitually exercises in the UK, authority to do business on the company's behalf and that agent is not of independent status acting in the ordinary course of its business.

Agency permanent establishment risk The most likely situation in which a globally mobile employee can create a permanent establishment in another jurisdiction is where the employee is deemed to be a dependent agent acting on behalf of the company. Factors that may point to an agency permanent establishment are as follows: if the employee has the ability to bind the company in any way or exercise any discretion on behalf of the company; if the employee can enter into contracts on behalf of the company; if the employee has the authority to act on behalf of the company, and if the employee has dependent status i.

permanent establishment risk factors

Fixed place of business permanent establishment risk Most fixed place of business permanent establishments will arise where a business has a clearly identifiable base of operations such as a branch or office. Employment taxes In addition to the corporation tax consequences of having a UK permanent establishment, the income of the employees of the permanent establishment will also be subject to UK income tax and NICs from the first day of the existence of the permanent establishment.

Recommendations Monitoring permanent establishment risk should be an ongoing process and clear guidelines should be implemented by companies in order to track the position appropriately. Permanent establishment rules vary across jurisdictions and it will therefore be necessary to obtain local advice in order to ensure compliance. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice.

You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have. Client work. On-demand webinar.

Author s.Business has never been more global. Companies of all sizes can take advantage of opportunities on an unprecedented scale, regardless of size or resources.

Thanks to the rise of mobile communications, business can be done from virtually anywhere, making it easier than ever to outsource projects to independents to save on costs such as employee taxes and social security.

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However, global expansion has its risks. Any company entering a new market knows that the new venture could fail or under-perform. Other risks involve matters of compliance that could result in fines for the company and damage to its reputation.

One such risk that has been discussed a great deal over the past year is the misclassification of contract workers. Too often, companies treat their contractors as regular employees but continue to classify them as independents to avoid their obligations to the workers. Governments have begun to crack down on the practice dramatically. Another risk is permanent establishment. Permanent establishment risk refers to the risk of a local tax authority in a foreign country determining that your business is operating in that country continuously rather than just sporadically.

It can then declare the business a permanent establishment liable for all corporate taxes. Knowing what might trigger the tax authorities to declare your business can help you avoid fines and unplanned tax expenses. Good advanced planning can help you reduce the risk.

permanent establishment risk factors

Permanent establishment PE is a tax concept that varies from country to country and is often included in trade agreements, but is generally understood to mean that a tax authority deems a business to have a stable and ongoing presence in the country and is therefore subject to corporate taxes and possibly VAT.

The final authority on status, however, is the local tax authority. The burden of proof is with the company to demonstrate that the activities are auxiliary and do not warrant a permanent establishment status. If a company is deemed to have permanent establishment, it will be subject to all of the taxes it would pay for profits generated in the country, according to the local tax rates.

Permanent Establishment Risk Checklist

Many businesses operate abroad at various points without setting up corporate entities. A company might send an agent to a foreign country to close a deal for import or export, for example. Another company might make an occasional visit to a foreign country to provide maintenance for a product it sold, such as software that needs occasional technical assistance or training.

Depending on circumstances and the country, even those activities can be a risk. If the agent generates profits or sales, it could be enough to warrant tax authorities to take action. If the maintenance is long-term rather than sporadic, it could be deemed permanent. Activities do not have to involve commerce and or even concluding contracts. The following are basic guidelines for the types of activities that can result in permanent establishment:. While the OECD does not have the power to enforce a particular definition and it remains up to each country to adopt its own standards and definitions, the OECD has proven to be highly influential in this area.

According to the OECD guidelines, permanent establishment has a number of elements. If your company operates from a particular, set location on a regularly recurring or continuous basis abroad, it could be deemed to have a fixed presence.

If your workers return to the same location to carry out work on behalf of the company when they visit, or if there is a mailing address for your company or bank account, there is a risk that the venture could be considered a permanent establishment. The idea of a place refers to a facility you company has access to when it does business in the country. The place does not have to be used exclusively for business, but if it remains in the control of the business and used for business, it could increase risk of permanent establishment.

The third element is that the fixed location is used for the purposes intended to increase profits for the company. The companies most at risk for permanent establishment status are those that bypass their tax burden by operating without a legal entity or any other reporting mechanism, either intentionally or because they believe their activity is merely auxiliary.

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For a company that has occasional but recurring business in a particular country, or an ongoing project, opening a Global PEO could mitigate the risk. The goal is to maximize profits in a business venture while working within a planned budget. A PEO or an associated vendor serves as the employer of record, so all of the business activity is in full compliance with tax authorities and all necessary taxes are reported and paid.We are very happy with the service Nordic Visitor (and Hanna specifically) provided.

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Permanent establishment risk: How to protect your organization when operating abroad

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permanent establishment risk factors

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