Permanent Establishment

Permanent Establishment (PE) is becoming an increasingly important topic in a world where remote work and cross-border employee mobility, including workations and business trips, are prevalent. Mismanaging PE can result in significant administrative burdens, monetary penalties, and fines for your company. Nevertheless, the risks should not discourage your employees from engaging in business trips abroad or benefiting from temporary working abroad.

In this article, we explore the PE risks associated with workations and business trips, and discuss strategies to mitigate these risks during the employees’ stay abroad.

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What is a Permanent establishment?

A permanent establishment (PE) is a fixed business location used to carry out company activities outside the company's home country.

There are several types of Permanent establishment, for example:

• Fixed place of business PE: a physical location or premises in a foreign country that the company uses to execute significant business activities (for example, an office).
• Dependant Agent PE: occurs when an employee or an entity habitually concludes contracts or negotiates them exclusively (or almost exclusively) for the foreign enterprise (the PE).
• Service PE: a situation when an employee provides services from a foreign country on behalf of the home country’s entity for a specific period of time.
  • Unlike a fixed place PE, a service PE can be established based on the presence and activities of employees over time, even without a physical location for business activities.
  • Unlike a dependent agent PE, a Service PE is based on the duration and nature of service activities performed in the host country, instead of authority to conclude contracts.

Temporary work arrangements abroad, such as workations and business trips, carry a risk of constituting a PE if not managed correctly. The existence of a PE is determined based on certain criteria set by local authorities, which vary from country to country. Therefore, to mitigate the risk, it is important to assess the risk of constituting a PE on a trip- and employee profile-specific basis.

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What’s the risk of creating a PE during a temporary employee presence abroad?

Workations

As the name suggests, Permanent Establishments contain a certain level of permanence in business activities abroad. Since temporary workers abroad (in this case, workationers) do not meet the criteria of being "permanent," and given that a workation is generally a temporary work abroad arrangement, it typically does not meet the threshold required to constitute a PE.

Both the OECD and the UN, whose tax treaty models are widely adopted, support this claim. They state that a 'fixed place of business PE' and a 'service PE' are generally not established if the presence in the other country is less than 183 days within a 12-month period. Meanwhile, if the international stay exceeds the 183-day threshold, it does not qualify as “temporary” anymore, and other regulations start to apply.

However, even with a temporary presence abroad, there is a risk that employees could create a 'dependent agent PE'. According to the OECD and UN, a 'dependent agent' is an employee who regularly plays a significant role in concluding contracts. The term ‘regularly’ typically implies a specific frequency, such as concluding five contracts where the individual played a leading role.

Therefore, it's theoretically possible for a dependent agent to establish a PE even during a workation lasting as little as one day.

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Business travel

While international travels for workations are driven by employees without a specific business purpose, business trips involve employees traveling for business-related activities, such as visiting clients or offices. Consequently, the risk of creating a Permanent Establishment (PE) is significantly higher for these trips.

If the presence in the destination country is short and limited, it is unlikely that a business traveller would constitute a PE. However, the situation changes if the company’s presence is substantial—for instance, if the traveller or a group of colleagues are present in the destination country for longer periods or more frequently.

Therefore, evaluating factors such as the employee’s role, seniority, authority to sign contracts, and other relevant details, along with the company’s overall presence in the destination country, becomes even more crucial during business trips.

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What are the consequences for a company if a PE is created?

If a company establishes a PE, it triggers tax obligations where the local authorities can tax the revenue generated by that PE through corporate tax and VAT, among others.

In case an employee traveling abroad for a workation or business trip constitutes a PE in the destination country, this would require the employer to register locally, attribute profits to the newly-established local branch, and file a corporate tax return, among others, all of which requires time and effort from the company and results in monetary consequences, for example:

• Corporate tax of 20% to 35% on attributable profit
• Administrative obligations exceeding €50,000
• Penalties for not registering and/or filing on time
• Interest for late remittance of corporate tax
• Employer brand damage and other non-financial repercussions

Since managing these liabilities involves considerable administrative effort, it is in the employer's best interest to avoid the risk of setting up a PE abroad

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How to handle the PE risk?

To assess and mitigate the risk of creating a Permanent establishment, employers should consider the following information about the employee and their trip:

• Reason of stay (eg, privately initiated workation or a business trip)
• Duration of the trip
• Previous travels within the specific country over the last 12 months
• Employees' activities performed while abroad
• Tax payments

Depending on the nature of the trip and the activities to be performed from the destination country, the risk can highly increase (i.e., negotiating contracts would involve a much higher risk than conducting business support activities).

Additionally, the duration of the stay is also key as exceeding certain time limits, 183 days over a running period of 12 months, could lead authorities to conceive a PE. For this aspect, it’s important to consider previous trips in the country as accumulated duration may be taken into account when evaluating the establishment of a PE if it has been triggered.

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WorkFlex approach of managing PE risk during workations

While workations and business trips do possess risk of creating a PE, it can be successfully managed and should not discourage employers and employees from these cross-border activities. To assist companies in managing this risk, WorkFlex has developed an advanced risk assessment framework.

For each employee trip, WorkFlex evaluates factors such as the employee’s role, seniority, authority to sign contracts, length of the trip, and other relevant details. Considering employee-specific factors and destination specifics, WorkFlex determines the potential risk of creating a PE.

As a result, employers benefit from a comprehensive overview of the PE risk, implementation of risk mitigation measures, as well as the WorkFlex’s no-risk  concept, which assumes liability in case any potential risks materialize during the trip. To delve deeper into the logics behind PE risk assessment, book a free consultation with the WorkFlex team.

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Conclusion

Permanent Establishment (PE) is an increasingly critical consideration in today's landscape of remote work and cross-border employee mobility. Mismanaging PE can impose significant administrative burdens, monetary penalties, and fines on companies. However, if properly managed, it is not an obstacle for international business trips abroad or temporary work-from-anywhere benefits to employees.

We have explored the risks associated with PE during workations and business trips, emphasizing the importance of proactive risk assessment and mitigation. By evaluating factors such as the nature of the trip, duration of stay, and employee roles, companies can effectively manage PE risks and navigate international tax compliance requirements. This proactive approach not only safeguards against potential liabilities but also enables organizations to capitalize on global mobility opportunities responsibly.

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Deep-dive articles about Permanent establishment:

• There's no "permanent" in temporary work from abroad
• Compliance topics around workations
• Unlocking the hidden costs of unmanaged business trips