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Permanent Establishment - the sticky issue of cross-border taxes explained simply.

When a company employs workers – and is making money - outside its country of residency, it’s likely liable to attract the interest of the tax authorities. Why? Because every country wants to tax revenue generated in their own territory.

What’s that got to do with Permanent Establishment? A lot! Permanent Establishment is a legal term. The basic principle behind it is that foreign businesses should pay local taxes if they’re making money locally or if their actions seem likely to generate revenue locally.

Sounds easy...It gets more complicated unfortunately. Each country has its own domestic laws on Permanent Establishment, each of which cover a variety of different scenarios. Historically, a common key determining factor would be having a physical presence, a ‘bricks and mortar’ office for example. However, tax authorities are quickly adapting to the new world of digital and non-physically present commercial activity.

What does that mean? It means that the concept of Permanent Establishment is becoming broader. Imagine that a senior employee is hired remotely in a different country to work from home in a decision-making role. That senior employee can contract and close deals on behalf of her employer. She is likely to be generating revenue and thus acting as a taxable presence on behalf of the business.

Anything else I should know? International double tax treaties often cover Permanent Establishment. This avoids taxation conflicts between nations. However, the unfortunate truth is that there is not a single set of rules that all countries will abide by. The Organisation for Economic Co-operation and Development (OECD) has made significant progress on this front, but it does not have any legal power to set international standards, and although its member states often look to it for guidance, its membership is limited to just 38 countries.

What would happen if a country claimed a tax debt against me? It’s extremely hard and costly for a foreign tax debt to be claimed against a company in its own home country. However, if a tax issue of this kind arose, it’s likely that you would be barred from trading in that foreign country again until your debts had been settled, along with interests and penalties. Of even greater concern, in certain countries directors may be held to be criminally liable for intentionally evading taxes. They could - potentially - be arrested the moment they set foot in that country. You have been warned!

Got any questions about cross-border employment?

At PEO Legal, we provide legal and compliance advice for professional employer organisations and staffing companies around the world. If you want advice about Permanent Establishment - or any other point of cross-border employment law - contact us, today:


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