We have written this article for entrepreneurs leading a business overseas, managing a company from abroad or paying a salary to a representative in a foreign country for selling goods or services of the company.

Our experience is showing growth of tax risks in connection with permanent establishments. We wish to introduce you to such risks, so that you are able to prevent them in a timely manner.

What is a permanent establishment, how it occurs and what implications does it have?

International treaties on prevention of double taxation allow tax authorities of a foreign state to tax income that your enterprise receives via a permanent establishment in such country.

Generally, our clients are well aware that a construction project in a foreign country the term of which exceeds 6 months creates for the company a permanent establishment in the country of the project.

In addition to the likelihood of creation of a permanent establishment in connection with construction, tax risks of such kind may also apply to entrepreneurs not involved in construction.

A permanent establishment is created by:

• a specific physical place of business (a site) in a foreign country. It can be an office, a place of residence/work of a sole member of the management board, a hotel room, a market square, etc.;
• a location of the management;
• a contractual representative, if he/she has the right to conclude contracts in the name of the company.

Creation of a permanent establishment leads to the following tax-related obligation of the company in a foreign country:

• payment of income tax from profits generated by the permanent establishment;
• payment of taxes from salaries of employees of the permanent establishment;
• payment of VAT.

Why is timely registration of a permanent establishment important for a company?

Unfortunately, often clients come to us only when the problem is already at hand: no permanent establishment was registered before commencing business and tax authorities of the foreign state have issued the respective decision and demanded payment of interest. Fines and interest in a foreign country can amount to tens of thousands of euros. For an entrepreneur, such costs are unpredictable and often result in liquidity problems.

Timely registration of the permanent establishment and organization of respective accounting practices help to save time that otherwise would be wasted on solving problems, as well as money and necessary working capital.

Permanent establishment registration package

Based on our extensive consulting experience we have developed the permanent establishment registration package. This package is designed for entrepreneurs entering foreign markets, where a permanent establishment is created on the grounds mentioned above.

1Office teams in Estonia, Sweden and Finland will be happy to advise you on matters related to the permanent establishment, help with necessary registrations, as well as preparation and submission of reports. The permanent establishment registration package includes all the necessary registrations and 2 hours of consultation.

To get advice, please contact us by email sales@1office.co.