Expanding into new markets is an exciting opportunity, although there can be new risks to work around as you expand.
Every day commercial acts, whether that is sending employees abroad, signing contracts on-site, or storing stock in a foreign warehouse, can unwittingly create a permanent establishment (PE) and generate local tax liabilities.
The difference between an incidental presence and a taxable foothold often comes down to fact and documentation, which means that you need to have a solid strategy and a clear plan before you proceed.
What is a permanent establishment in practice?
A PE is a local taxable presence.
The most obvious trigger is a fixed place of business where you regularly conduct activities, but tax authorities commonly look beyond bricks and mortar.
A remote employee working from their home in another country may be enough if the local rules treat that home as the company’s place of business.
Equally, repeatedly signing contracts in a foreign market, providing long-term services on site, or using dependent agents to secure business on your behalf are classic PE flags.
Even warehousing can be problematic, as while some treaties allow inventory storage without creating a PE, many jurisdictions will probe the commercial reality of your arrangements.
How do you spot the danger signs?
Start by mapping the activity that takes place overseas and who is doing it.
You need to have an awareness of exactly what business you are doing in each country and how much.
Red flags can include:
Frequency and permanence matter as a one-off consultancy visit is different to a string of similar assignments that together create a sustained presence.
If the activity is repetitive and generates revenue locally or uses local resources under your control, then it would be wise to assume a PE risk until demonstrated otherwise.
How can I mitigate the risks of creating a permanent establishment?
To try to mitigate the risk of PE, you should try to keep decisive commercial acts within the home jurisdiction.
Use independent local distributors rather than dependent agents who habitually act in your name, and structure overseas projects as discrete short-term engagements to avoid “service PE” rules.
If you need a local footprint, consider virtual offices and limited-purpose arrangements that minimise control and permanence.
For warehousing, weigh third-party logistics partners instead of company-owned storage, and document the contractual terms so it’s clear the inventory is not under your direct control.
Keeping clear documentation is your best defence.
This will help you gauge the extent to which your business dealings are at risk of creating a PE.
If you conclude that a PE cannot be avoided, engage early with local advisers to model the tax cost so that you do not end up missing out on vital funds later down the line.
Often, a pragmatic restructuring of how services are provided can remove or reduce liability.
We want international business to be a boon for your company, so we will help advise you on any issues that are likely to impact your finances.
Don’t get caught out by the permanent establishment rule. Speak to our team today!
