The term ‘permanent establishment’ is not well known amongst entrepreneurs, but it is widely used by tax authorities. Its importance arises when your enterprise carries out business activities abroad. The lack of knowledge about the risk of permanent establishment has led to many businesses receiving demands for tax and interest payments from tax authorities.
According to a recent survey conducted by PricewaterhouseCoopers, tax authorities are taking more interest in foreign companies operating in their jurisdictions. They see assessments of local permanent establishments as an easy way to increase their revenue.
What is a permanent establishment?
A permanent establishment is a fixed place of business through which any revenue generating activities are wholly or partly carried out. The term includes:
- a place of management;
- a branch;
- an office;
- a factory;
- a workshop, and
- a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
A building site, construction or installation project constitutes a permanent establishment only if it lasts more than six months (6, 12 or 18 months depending on the provisions of the bilateral tax treaties).
A permanent establishment generally leads to income tax liability in a particular jurisdiction. Simply put, tax authorities in the local country have the right to impose corporate income taxes on the profit you make in their jurisdiction.
Furthermore, there might be risks involved if your agents and representatives work for you abroad, even if their work is temporary. If tax authorities claim you have a permanent establishment where your agents are working, they will impose employment taxes on the salaries you pay, even if you have paid all employment taxes in the country in which your business is registered. The effects of these tax obligations can have negative effects on your business.
Determining whether your enterprise has a permanent establishment
Firstly, it is important to answer the following questions:
- Does your enterprise conduct business wholly or partially abroad?
- Does your business have a fixed location abroad that is at the disposal of the enterprise?
- Do your representatives and agents make sales and negotiate contracts abroad?
- Do you provide construction, installation or related services abroad for longer than 6 months per year?
If you answered ‘yes’ to any of these questions, your enterprise might have a permanent establishment in another country, and you might be liable for further tax payments.
Permanent establishment audits and taxation are trending amongst tax authorities, creating disputes and uncertainty for taxpayers. They also pose a significant risk of double taxation. That is why it is recommended to let your tax risks be assessed by professional tax advisors.
Tax advisor
Katrin Allmäe
