Permanent establishment or not? A checklist for international expansion

4 October 2011
If your business is expanding internationally, you are likely familiar with the phrase permanent establishment (PE). Any business activity that generates revenue in a country can be deemed by local authorities as having created a PE, giving that country the power to assess income or a value-added tax.

The problem with PE is that it often exists in a grey area, open to interpretation by fiscal authorities in different countries. What’s considered to be revenue-generating in one place may be seen as purely marketing (non-revenue generating) elsewhere.

Here’s a quick checklist to help you determine whether or not your company has setup a PE:

  • Are you operating out of a fixed place of business? A fixed place of business is a common PE trigger. This may include not only formal office accommodation, but also an employee’s home office where a dedicated business telephone line is available, the home address is used on business cards or the home address is used as a postal address for company correspondence.
  • Are your employees receiving commission? If your employees on the ground in a country are receiving sales-related compensation, such as sales commissions and bonuses, you will likely have PE. This may also extend to stock options in some countries.
  • Do your employees have revenue-generating roles? Job titles or job descriptions that indicate activities related to direct revenue generation/support or sales activities can trigger PE.
  • Are sales made to customers in-country? If contracts are negotiated by the local employee, PE may be created. Even though the employee may not have power to sign commercial contracts, if he or she is deemed substantially involved in negotiating the terms, identifying the customers and concluding the contract terms, then it is likely that the contract will have been deemed to have been finalized locally.

Remember, in most countries, in order to recognize a PE, it needs to be formally registered under some corporate identity, typically a branch, representative office or a subsidiary entity. Be sure to contact us if you have any questions on your overseas expansion setup and registration.