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Employers’ newsletter - creating a permanent establishment by accident

Creating a permanent establishment without planning (or even intention) is surprisingly easy to do but can give rise to significant tax complications and possibly costs.

Any activity carried out by a business in an overseas country that results in revenue being generated or value created is likely to be deemed by local tax authorities as a permanent establishment (PE). As a result the business will be liable for local taxes on the deemed revenue arising in that country.

In any given country whether or not a PE exists is determined by the local laws and any relevant double tax treaties. The determination of a PE is very much a grey area, but some tests are commonly used by tax authorities worldwide:

  • The organisation operates out of a fixed place of business in the other country. This may include not only a formal office but also in some situations an employee’s home office;
  • An employee based in that other country receives sales-related remuneration;
  • An employee’s job title or description indicates activities related to revenue generation or sales, and that employee operates in the host country for a prolonged period;
  • Sales are made to local customers under contracts negotiated by a locally-based employee, even if such sales are ratified by the main employer.

The above is quite wide ranging so here are some examples of situations that could give rise to a PE:

  • You send a technician to another country to conduct software installation and maintenance services over a prolonged period to service a new client;
  • You issue local payslips to an employee whose job title includes the word ’sales’.

A PE will generally not be deemed to exist where the activities performed are preparatory or auxiliary in nature, in other words they do not form an essential part of the business as a whole.

If a PE is created you will appreciate there is the possibility of a higher rate of tax being paid; although the overseas tax can normally be offset in the UK, the higher of the two rates will normally be applicable.  There may, of course, be issues regarding employment taxes and VAT equivalent.  It is always better therefore to check the position early on so you can make sure that local taxes are avoided or, at least, ascertained and planned for.

If you require further advice or assistance, please do get in touch.

 

 

Date: 27th March, 2019
Author: Jacqui Gudgion

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