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What is a permanent establishment?

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A permanent establishment (PE) is when a business has an ongoing, stable presence in a country or state outside of its home base. In this situation, the company is liable for taxes in that jurisdiction. In other words, a PE is a corporation with a taxable presence outside of its main territory.

What are the three types of permanent establishment?

PE usually falls into one of three types:

  • Physical-based establishment: An organization that performs specific, income-generating activities outside of the country. Examples include data centers, hotel chain subsidiaries, and storage facilities for merchandise processing.
  • Agency-based establishment: The company has a local agent (“agency”) to perform activities on the employer’s behalf in the chosen jurisdiction of operation. Examples include franchises, auto dealerships, and education and language development centers.
  • Service-based establishment: A foreign presence a company establishes to sell services abroad. Examples include management consulting, financial services, and online marketplaces.

How can you avoid risks associated with permanent establishments?

Businesses can protect their permanent establishment risks with the following actions:

  • Working with a local tax specialist to ensure compliance
  • Establishing a local business entity to stay fully compliant with local tax authorities
  • Using a global employer of record to limit PE risk while reaching global hiring and expansion goals

Which business situations can lead to permanent establishment risk?

Several factors can lead to permanent establishment risk. Whether intentional (i.e., companies purposely do not disclose taxable revenue to the foreign countries they’re operating in) or unintentional (an employee does not realize they have created a permanent establishment when marketing goods and receiving revenue on commercial activity), businesses may want to be aware of risks such as:

  • Employing workers who contribute to the creation and trade of products that earn revenue
  • Withholding employee income and social security taxes
  • Employing workers under a long term fixed-term contract who regularly work inside a foreign country for an extended period of time
  • Receiving payments from clients operating inside the country and withholding taxes
  • Signing contracts with businesses inside the country and profiting off the contracts
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