Simply, PE is what gives a country the right to tax any corporate revenues created within their borders, based on a sufficient and continual business presence.
While that may seem reasonable, the challenge for multinationals is that the definition and tests for what triggers permanent establishment differ between countries, and there is no universal standard that is applied. However, there are some guidelines that a company can use to anticipate when they might be subject to PE and local taxation, in addition to diligent research into local tax laws.
How is Permanent Establishment Triggered?
The three main areas of review for permanent establishment risk are employee activity in a fixed place of business, business activity, or revenue creation. Any one of these can trigger permanent establishment and corporate income tax or VAT, affecting the long-term return on investment in a foreign market.
1. Employee Activity in a Fixed Place of Business
The fixed place of business test is the most common (and easily identified) and can include a branch office, factory, or another facility. This would also mean that the company would likely have a local corporate entity set up and registered. More modern applications of PE law are even including computer servers as a fixed place of business for digital transactions, even if there is no branch office or long-term employees in the country.
2. Business Activity: Employing Sales Staff in a Foreign Country
Naturally, employing local or expat staff will... read more
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