Permanent Establishment (PE)
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.
What is a Permanent establishment?
A permanent establishment means that your company becomes tax-relevant in a foreign country. Permanent establishment is created when tax authorities determine that your business activities abroad are substantial enough to warrant local taxation, even if you don't have an official office or subsidiary there. Once established, it typically creates obligations for corporate tax, payroll tax, and sometimes value-added tax in the host country.
A permanent establishment can be triggered in multiple ways:
Fixed place of business PE
This is the most straightforward type - it involves a physical location where your company conducts business activities. Examples include:
- Rented offices or co-working spaces abroad
- Home offices where employees regularly work
- Even vacation rentals or Airbnb properties if used consistently for business
The key factor isn't ownership - it's regular use of the location for substantial business activities.
Many companies are surprised to learn that their employee working from a Portuguese villa for a month could potentially create a fixed place of business PE.
Dependent agent PE
This type can be triggered by people rather than places. A dependent agent PE occurs when someone habitually negotiates or concludes contracts abroad on behalf of your company, regardless of their official position.
The term "habitually" implies a certain frequency - for example, five contracts where an individual played the leading role. Here's what makes this particularly risky:
even a single day abroad could theoretically create a dependent agent PE if the right conditions are met.
Service PE
Some countries, particularly India and Portugal, have specific rules where simply providing services for a certain period (often 183 days within a 12-month period) can establish a permanent establishment, regardless of having a fixed location.
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, rather than 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.
What’s the risk of creating a PE during a temporary employee presence abroad?
Permanent Establishment risk in Business travel
Business trips involve employees traveling abroad specifically for work-related purposes, such as meeting clients or attending business events. The Permanent Establishment risk for business trips is higher, as the presence of employees in the host country may lead to the establishment of a PE if the company has a more substantial presence (e.g., frequent or long-term stays).
Factors such as the employee's seniority, role, authority to negotiate agreements, and the duration of stay are crucial in determining the likelihood of triggering Permanent Establishment taxation risks in the form of income tax, corporate tax, and VAT obligations in the host country.
Certain scenarios consistently trigger permanent establishment risk, and many of them involve activities that feel routine in today's global business environment. High-risk business travel scenarios include:
- Extended project assignments: Even a two-month stay in India can pose risks, even without exceeding the 183-day threshold
- Contract negotiations abroad: Preparatory discussions or contract conclusions by employees can be particularly dangerous
- Flex-office arrangements: Short-term rented workplaces are risky because they can be classified as fixed facilities
- Cumulative presence: Multiple shorter assignments can add up to establish a PE, even if individual trips seem harmless
The Accumulation problem
Here's something that catches many companies off guard when assessing permanent establishment risk: it's not just about individual employee stays. The cumulative presence of multiple employees, especially those working on the same project or with organizational overlap, can create permanent establishment risk even when no single person exceeds time thresholds.
For example, if three employees from your team each spend 60 days in Germany working on the same client project throughout the year, authorities might view this as a 180-day presence that approaches permanent establishment territory.
Permanent Establishment risk in 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.
What are the consequences for a company when Permanent Establishment is created abroad?
If a company inadvertently creates a Permanent Establishment (PE) in a foreign country, it triggers several legal and financial obligations. These can include:
Tax obligations
- Corporate tax: Local taxation of profits attributable to the PE, typically ranging from 20% to 35%
- Payroll tax: Obligation to remit payroll taxes in the host country
- Value-added tax: Additional complexity in cross-border service delivery
Administrative burden
Creating a permanent establishment doesn't just mean writing a check to foreign tax authorities. You'll face:
- Mandatory registrations with local authorities
- Ongoing documentation and filing requirements
- Need for local tax advisors and legal representation
- Complex inter-company billing and profit allocation procedures
Financial and reputational risks
Even when you're ultimately cleared of PE obligations, the process itself can be overwhelming:
- Legal disputes that tie up resources for months or years
- Professional fees that easily reach five-figure amounts
- Unplanned tax demands that blow operational budgets
- Reputational damage from public disclosure of tax disputes
The most frustrating part? Even discussions with tax authorities become expensive. Companies regularly spend significant amounts just proving they don't have a PE, quite apart from any actual tax liability.
How to manage Permanent Establishment risk during Business trips and Workations?
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 work from anywhere trip 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.
WorkFlex approach of managing PE risk during business trips and 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.
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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