The Permanent Establishment Question

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A permanent establishment describes a taxable business presence of an overseas entity in a jurisdiction where it is otherwise not registered. Permanent establishments in the past have been rather self-evident by physical presence in one or another way. In the digital economy, this is no longer the case and requires a different approach. 


A permanent establishment is created by business activity that is sufficient for a corporation to be viewed as having a stable and ongoing presence in a foreign country. If the activity results in revenues in the jurisdiction of the permanent establishment, corporate taxes may be imposed on taxable income of such revenues.  As the term implies, a permanent establishment will be triggered by a company’s activities that reflect ongoing and persistent revenue creation, rather than occasional or isolated business efforts.

Types of Permanent Establishments

Every country may have its own criteria on what they regard as a permanent establishment. The Organisation For Economic Cooperation and Development (OECD) as an international standard setter often leads the way in policy development which is then adopted by its member states. The OECD tax treaty model agreement sets the standard criteria defining a permanent establishment which is then adopted by most countries exactly or with slight modifications to suit domestic requirements:  

1. A fixed place of business, address, or other physical presence. The historical and easiest test of a permanent establishment is having a fixed place of business which may include a branch, an office, a factory, a workshop, a mine, gas, or oil well, or building and construction project activities. 

2. Activities by employees in a country that directly relates to revenue creation. Employees that work as sales agents and have the authority to conclude contracts in the name of an enterprise may in itself be sufficient to create a permanent establishment. The areas of service permanent establishments is expanding in scope and can include situations such as providing technical or managerial services in a country. In some countries,  even typical back-office services may constitute a permanent establishment.

3. A sufficient or extended time of activities may cause a permanent establishment under local law or a tax treaty. This may be the case in construction or technical services provided over an extended period.

4. Actual control and direction over the employees’ or agents' activities by the overseas company. 

An emerging, but yet uncertain area of permanent establishment rules is that of revenue created through digital or virtual activities.  Major IT and e-commerce companies have escaped permanent establishment taxation based on traditional definitions, but now those criteria are being adapted to keep up with the modern age of e-commerce and digitization. The OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan specifically addresses this topic and is a clear indication that legislative changes are to follow. New criteria are being applied to e-commerce companies based on a virtual presence that generates revenue from a foreign country. Online retailers, internet advertising, app stores and media sites can generate revenue in a country without any type of physical presence. 

Permanent Establishment Risks

There is always a risk that a business activity in a foreign country could result in a permanent establishment and corporate taxation. The problem for many companies is that they may not even be aware that their presence is in effect a permanent establishment. They are then met with unexpected tax liabilities that can be difficult to resolve and may lead to double taxation. Particularly in light of changing tax laws for the BEPS implementation. The only way to know if your company’s activities are triggering permanent establishment taxation is to get expert advice. If a permanent establishment is created by the activity undertaken in that country, it is important to examine the availability of a double taxation treaty and the type and procedures of a tax claim. Often a substantial collection of documents will be required to process any double tax treaty claim. 

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