What is a Permanent Establishment?
A Permanent Establishment (P.E.) is a fixed place of business which generally gives rise to an income or value-added tax liability in a particular jurisdiction.
With Governments across the globe looking to ensure that they collect as much in tax revenue as possible, the deemed creation of P.E. in the work country seems to be an increasing trend.
Exactly what constitutes a P.E. varies from country to country and can be determined with guidance from the work country’s applicable tax treaties.
The starting point for determining if a P.E. exists is generally a fixed place of business. Article 5 of the OECD Model Income Tax Treaty is followed in most income tax treaties.
The commentary indicates that a fixed place of business has three components:
- Fixed refers to a link between the place of business and a specific geographic point, as well as a degree of permanence with respect to the taxpayer. An “office hotel” may constitute a fixed place for a business for an enterprise that regularly uses different offices within the space. By contrast, where there is no commercial coherence, the fact that activities may be conducted within a limited geographic area should not result in that area being considered a fixed place of business;
- A place of business. This refers to some facilities used by an enterprise for carrying out its business. The premises must be at the disposal of the enterprise. The mere presence of the enterprise at that place does not necessarily mean that it is a place of business of the enterprise. The facilities need not be the exclusive location, and they need not be used exclusively by that enterprise or for that business. However, the facilities must be those of the taxpayer, not another unrelated person. Thus, regular use of a customer’s premises does not generally constitute a place of business;
- Business of the enterprise must be carried on wholly or partly at the fixed place.
In short, as a very basic example, if you were to operate through your Personal Service Company (PSC) in a foreign country for a significant length of time (>12months) and if the management and control of your company is considered to exist in that work country, then your company may present indications of having a P.E. in the work country.
What should you do if a P.E. in the work country is created?
First and foremost, do not panic. You are not doing anything wrong. The Permanent Establishment concept is not new.
Generally, by its nature, contracting sees an individual/company moving from one client to another after a reasonable amount of time. If after a ‘reasonable’ length of time (determined country by country) you remain in the same work country, you/your company may be deemed to have created a P.E. in that country.
If you receive any correspondence from the work country tax authorities in this regard, please contact us accordingly and we will review your position and advise you accordingly.
It should also be noted, that just because a P.E. may be considered to exist, that does not automatically mean that it is so. It is possible to present arguments to the contrary and present a case for your company, to legitimately counter any such claims.
What are the implications of creating a P.E.?
If a Permanent Establishment is considered to exist, then your PSC will be subject to the work country Corporation Tax, VAT and other tax and Social Security implications may apply. Depending on the facts of each case, this may be applied with retrospective effect.
Are there ways to minimise the chance of creating a P.E.?
Yes indeed. There are ways to minimise the risk of creating a P.E. in the work country and these include, but are not limited to, the following:
- appointing another Director in the home country of the company;
- the work country Director relinquishing their signature rights while on assignment in the work country;
- evidencing that management and control of the company exists in the home country, through the taking of important company decisions, holding of board meetings, resolutions, meeting minutes;
- not having the contractor as the Person of Significant Control of the company;
- obtaining an employed A1 from the company’s country of origin.
Even if your PSC is deemed to have created a Permanent Establishment in the work country, it is not the end of the world!
Depending upon your circumstances, even with the existence of a P.E., contracting via your PSC may still provide a competitive retention in comparison to other options available.