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a country the right to tax any corporate revenues created within their borders, based on a sufficient and continual business presence.

While that may seem reasonable, the challenge for multinationals is that the definition and tests for what triggers PE differ between countries, and there is no universal standard that is applied.  However, there are some guidelines that a company can use to anticipate when they might be subject to PE and local taxation, in addition to diligent research into local tax laws.

The main areas of PE review are

1) employee activity in a fixed place of business,
2) business activity, or
3) revenue creation.

Any one of these can trigger permanent establishment and corporate income tax or VAT, affecting the long term return on investment in a foreign market.

1. Fixed Place of Business

The fixed place of business test is the most common (and easily identified), and can include a branch office, factory or other facility.  This would also mean that the company would likely have a local corporate entity set up and registered.  More modern applications of PE law are even including computer servers as a fixed place of business for digital transactions, even if there is no branch office or long-term employees in the country.

2. Business Activity: Employing Sales Staff in a Foreign Country

Naturally, employing local or expat staff will catch the attention of tax authorities, who will want to know the type of activity and number of employees.  Any employee activity for PE must be habitual and ongoing, rather than sporadic or one-time visits.

As an example, employing long term sales staff can trigger PE as sufficient business activity, under certain conditions.  Usually, there will need to be more than marketing or exploratory measures, and the staff will need to have the authority to actually conclude contracts on behalf of the company.  A one-time sales visit would not be enough to trigger PE, even if resulting in a substantial contract.

3. Revenue Creation: Sales Staff Signing Contracts on Behalf of Company

The revenue creation test for PE is also triggered when staff are negotiating, drafting and signing contracts, with the majority of the work occurring inside the country over a period of time.  This may also occur if the company is using agents or subcontractors for sales, since the revenue will still flow to the company.

 

Specific Examples of Situations that Trigger Permanent Establishment (PE)

Within the primary PE triggers listed, there are specific examples that are likely to give rise to PE taxation rights:

• Habitual and revenue creating sales contracts for goods or services, concluded inside the country (not just once or twice)
• Technical service and support that results in revenue for the company
• Any type of long term, fixed branch office offering customer service, technical support or management-level activity
• Long-term (more than six months) production of goods in a factory
• Multiple digital sales to residents, even if there is no fixed place of business

Of course, each of these examples will ultimately depend on the tax laws of the host country and how PE is defined.

 

Permanent Establishment Checklist

It can be useful for a company about to enter a foreign market to refer to a PE checklist and evaluate how likely it is that the planned business activity will trigger PE.
These items must be reviewed in relation to the host country tax laws, to determine the standards used to define PE.

• Tax treaties between the two countries:
  sometimes a tax treaty will define what will amount to PE for treaty member states, with specific definitions and examples.
• Agency and service relationships:
  in some cases, even providing customer service or employing agents will trigger PE if there is revenue creation.
• Type of employee activity:
  local tax laws will likely define the type of employee activity leading to PE taxation, such as signing contracts and providing billable services.
• Tests of time duration for PE:
  many definitions of ‘fixed place of business presence’ will have a time duration when PE will kick in (i.e. six months of continuous activity)
• Revenue creation:
  this test can take the form of selling goods and services locally, or establishing new contracts. New PE laws take this one step further, and can even include digital sales inside the country (downloads, purchases) as qualified revenue creation for taxing rights.