PE PLAYBOOKWhat Permanent Establishment Is,

How It’s Changing and How to Protect Your Organization

The Concept of PE

The concept of permanent establishment determines if an

organization’s activities in a region are taxable by local authorities.

Unfortunately for multinationals, a business can establish a TAXABLE PRESENCE in a foreign jurisdiction without even knowing it has done so.

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To avoid penalties, interest and reputational damage … it’s critical to understand PE-related risks before undertaking any cross-border activities, including sending or hiring workers abroad.

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How is a PE Triggered?

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In any given country, a PE is determined by application of the local PE laws and any relevant double tax treaties entered into by that country.

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No one country has tax treaties with every other country. In the absence of a treaty, domestic tax law in the country where the

activities occur will determine if a PE has been triggered. However, PE legislation varies

significantly by country.

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Many tax treaties contain similar PE principles, though. These principles are outlined in

ARTICLE 5 of the Organization for Economic Cooperation and Development’s (OECD’s)

Model Tax Convention.

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Under Article 5, there are two primary ways an organization will trigger a PE:

1. By maintaining a fixed place through which the business of the company is carried on in the country, or

2. By having someone in the country who regularly concludes contracts on behalf of the organization (a “dependent agent”)

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A fixed place of business can mean:

• Any location with a certain degree of permanence (usually longer than six months) that an entity has a right to use or habitually uses to carry out business activities

• A home office if “used on a regular and continuous basis for business activities”

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In 2017, a Swedish Court ruled that a German company had a PE in Sweden even though their local activities were limited to short-term testing functions and the company maintained no physical office or storage facility in Sweden.

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A dependent agent can be:

• A person retained in a foreign country who is dependent on the hiring organization

• Someone with authority to conclude contracts in the name of the organization

• A self-employed worker or person employed by a third party who provides exclusive support to an organization

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When a company hires a contractor in another country to provide exclusive sales support, the sales contractor can be deemed dependent even if they don’t have the right to enter into contracts. If that contractor receives orders on behalf of the company and forwards those orders to the foreign principal for formal execution, a PE may be triggered.

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A truly independent agent will not trigger a PE. An independent agent works at arm’s length from the organization that hires them, essentially acting as a middleman.

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Be prepared and aware. Read the Permanent Establishment Playbook.

Someone providing tech support, a sales rep testing a new market and a local client liaison can all trigger a PE.

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