Global Mobility and Permanent Establishment Risk

When a multinational sends employees and contractors on foreign assignment as part of a global mobility strategy, the question arises of when that type of business activity will trigger a permanent establishment (PE).

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When a multinational sends employees and contractors on foreign assignment as part of a global mobility strategy, the question arises of when that type of business activity will trigger a permanent establishment (PE).  As discussed in this overview of PE, there are a few baseline tests for Permanent Establishment used in most tax treaties and domestic tax law.  The majority of those tests rely on a physical business presence and activity over a period of time to create PE and the resulting tax liability.

The era of global mobility across international borders has brought attention to undefined areas of business activity, which may or may not create Permanent Establishment risk 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 Permanent Establishment 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 won't impose PE unless the project exceeds six months, either continual or accrued during the tax year.

Agency Permanent Establishment – 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 Permanent Establishment risk 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, a related topic to be covered in a future article.

Subcontractors and Permanent Establishment Risk

Permanent Establishment risk 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. This strategy creates a legal buffer between the company in the home country and the employee’s activity in the host country.  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.

There is little doubt that use of GEO solution does create a separate legal employment relationship, which may shield the company from PE tax liability.  But, 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.


Multinationals with active global mobility programs need to assess the exact nature of the work performed in each country, and where PE could be created inadvertently.  This will depend on either local corporate tax laws or a tax treaty between the home and host countries.  When imposing PE, governments may rely on the degree of involvement and control by the home country company, as well as the nature of the employee’s actual work activity and the time spent in country.

If you have questions about your global mobility strategy and how a GEO solution could help avoid tax and employment compliance problems, please contact us at Shield GEO.

Read our other articles on Permanent Establishment here > 

Shield GEO makes international employment simple. Our customers use Shield GEO to employ and payroll hundreds of workers in over fifty countries. Find out more.

Tim Burgess

Director, Shield GEO Services Ltd