Navigating Permanent Establishment Risk: Strategies for Success

Setting the Scene: Lurking PE Risk

While venturing into global markets and establishing a lasting presence, the process of expansion carries the inherent 'permanent establishment risk.' Embrace growth opportunities while proactively addressing these lurking risks to ensure a successful international venture.. 

In times of everchanging tax, labour, and compliance laws, getting a steer on PE risk and how to manage it are a set of ever-moving goalposts.

In this guide, we’ll do our best to anchor those goal posts to one spot, so you can securely score the win and achieve your PE risk-reduction goals.

First Things First: What Exactly Is a Permanent Establishment?

If you're new to this, the concept of PE and PE risk can be confusing, involving a few grey and woolly areas. 

Now comes the tricky part: the criteria for creating a PE can vary from country to country, and depend on the local tax authority and/or tax treaty regulations.

Let's break it down into types of permanent establishments.

A permanent establishment is generally divided into: 

A PE with a fixed place of business: Having offices or other physical places of business in a foreign country or jurisdiction.

A PE Agency: Recruitment of a dependent agent to carry out business activities abroad.

Permanent Service Establishment: The provision of permanent services in another country or jurisdiction, even without a physical place of business.

Permanent construction establishment: Having a construction site or installation project in a country or jurisdiction for a specified period.

What triggers a permanent establishment?

While countries and local tax authorities define PE differently, there are universally common factors that can trigger permanent establishment. 

High-risk PE risks

Having an office or other fixed place of business can trigger hidden permanent establishment risks.

This could include:

• A branch, warehouse, factory, mine, or place of address
• A coworking space or home office (in some jurisdictions)
• Having someone locally based, such as a contractor, employee, or employee through an Employer of Record (EOR) who:
• Has the authority to sign contracts on your behalf
• Has management or senior management role
• Provides basic business services 

As you’re probably sensing already, it’s complicated. But it gets better (after it gets a little worse).

Low-risk PE triggers

It’s ok; there are also low-risk permanent establishment risks. What a relief (you’ve got this).

• Business trips to another country
• Hiring a local supplier or having a local customer
• Hire employees in another country who perform support activities that do not generate revenue

How many low PE risks are you triggering right now?

What are the indicators of a permanent establishment (PE)?

This may vary from country to country. Common PE indicators include: 

• A company that has its head office in a fixed or permanent establishment in the host country
• The local agreement between a dependent local employee and the sales is made in the host country
• Some double tax treaties include the concept of PE services, which can be created when a company in one country offers services in another country 

To fully assess your permanent establishment indicators, you’ll need to break down global operations by region and unpick the intricacies of how each country defines what counts as a permanent establishment.

Have fun with that! If it doesn’t sound like fun, Playroll can help by… actually, better to read on in case you do want to go it alone. The spoilers are at the end.

The benefits of making sure your PE set-pp is on point

By ‘on point’ we mean achieving a permanent establishment situation that:

• Reduces the possibility of surprise taxes
• Avoids sudden PE activation that can result in penalties and interest charged for a period you weren’t even aware of
• Provides the peace of mind of knowing that you are following the host country's laws and paying your dues
• LEt’s you find ways to improve your tax efficiency and find the best framework for generating income
• Can also be easier to work with the authorities and create a better relationship with the host country
  

That’s an unenviable laundry list of perks to achieve with a well-researched and well-implemented PE risk mitigation strategy and process that’s constantly in review.

If you go it alone and achieve continual permanent establishment risk oversight, your growth into new countries and expansion across existing countries shouldn’t bring any unwanted surprises.

Balancing PE Risk With Expansion Plans 

As more businesses reap the benefits of a globalised economy, tax authorities around the world are tightening regulations to ensure businesses pay what’s due.

To put it succinctly, things get a little risky when a business decides to move from on and off business procedures to permanent business procedures—which may be taxable and generate income in the foreign country in which they operate. 

Once a business becomes a permanent establishment, it is considered local. Therefore, the company will likely be subject to the payment of corporation tax or VAT on income generated in this country

Don’t be deterred from growth

This shouldn’t deter you from expanding your business overseas. There absolutely are ways to get around or even crush PE risk completely Especially with an Employer of Record partner (EOR) on your side (that’s us).

Until you enlist an EOR partner, understanding permanent establishment risk is crucial for any company doing (or planning to do) business overseas or employing international talent.

Have a PE approach plan (that factors in overseas growth)

Many companies also opt to operate internationally without creating a permanent establishment, but the risk starts to increase significantly when you employ people who permanently reside outside of your company's home country.

With a PE approach plan, businesses can prepare for these fees and develop strategies to determine the most appropriate locations to do business, such as those with favourable tax treaties. 

What Happens If You Get PE Risk Reduction Wrong?

What happens if you don't get PE right?

Well, you can expose yourself to unforeseen taxes and hefty penalties. If you have not planned for PE, these additional costs can be significant and affect your expansion budget.

A thorough investigation of the country and local laws will help you understand the level of risk you are taking. 

Here is what could happen if you get PE wrong:

• Depending on your business infrastructure, you may end up paying taxes in your home country and the host country. Even without a proper PE plan, you may see business taxes and withholding taxes on gross payments from a foreign country. Tax treaties between countries can help manage these burdens with things like lenient criteria or lower rates for partner countries.
  
• You could damage your reputation if you don't prepare for PE and may be seen as uncooperative and unwilling to pay your fair share. Your relationship with the country and its people could be threatened, which would be a major marketing problem for many companies leading to more audits and discussions with tax authorities.
  
• You could face interest charges and penalties if you've been flying under the PE radar for a while and you may be charged interest based on the taxes you should have paid during that time.
  
• Other penalties may also be incurred. You may have more reporting obligations once PE is activated with payroll and social security being major concerns, as some countries have high requirements for them. 

All of that time, planning and investment in mitigating PE risk can add up to a fat ‘zero’ if you make just one slip up. Ignorance isn’t an alibi.

That’s why we recommend looking at more robust options (like partnering with an Employer of Record) that can help actually bury parts of PE risk completely by bypassing the need for creating physical or even legal entities when expanding into new countries.

Smoothing the Road to PE Risk Reduction (or Bypassing It Completely)

Be honest with yourself. How many beads of sweat have appeared on your brow after reading this guide to PE risk? How much of it is new to growth stakeholders in your organisation?

If you’re resolute in mopping that brow and marching on with expanding and hiring overseas, just make sure you soak up all the learnings. Good luck!

The good news? It’s doable.

The bad news? Without the right support to take the legal hit and keep you on the straight and narrow, a rollercoaster ride of unexpected curveballs and compliance challenges is almost guaranteed, so buckle up.

Exit complexities: think hard before closing a PE

If you discover that the new market you've entered doesn't align with your initial expectations, the process of closing down a permanent establishment can prove to be almost as intricate and time-consuming as the initial setup. Hence, prior to embarking on this venture, it is crucial to thoroughly assess and understand the potential challenges and complexities associated with withdrawing from the market, should such a scenario become necessary.

Where to Start if You Go It Alone: Get the Right Expert, In-Country Support

When starting, appoint an advisor based in the country you are expanding into. Their role is to provide niche, insider knowledge that helps you shuffle through country-specific requirements.

Your employment compliance advisor should also know how a shareholding and ownership structure works from a legal viewpoint for compliance purposes.

It’s complicated already, right? That’s why you need in-country experts that constantly refresh their knowledge. Playroll’s on-the-ground employment law buffs dotted throughout our countries of presence can provide just that.

Don’t Feel Like Going It Alone?
We’ll Help You Bury Much of PE Risk for Good 👋

Playroll can’t claim to solve all of your overseas expansion challenges, but we can help you bury much of the PE risks you’ll encounter along the way.

Being able to identify and take charge of PE risks protects your business in the long term from being subjected to surprises from the taxman as well as hefty fines, penalties, and sudden interest charges. Being fully prepared also means that you’ll be able to make the right call from the outside.

How can Playroll help reduce or eliminate PE risk?

With an employer of record partners like Playroll on your side, we can help you lessen the blow by establishing an entity in a foreign country. 

We can:

• Decrease the costs associated with opening a PE
• Absorb the legal responsibilities of hiring staff abroad
• Manage your day-to-day HR functions so you can focus on running your business
• Ensure that your PE is compliant from the get-g
• Ensure that your foreign onboarding process is seamless and compliant
• Eliminate the possibility of being double taxed
• Promote positivity with accurate and efficient payroll, especially for multinational teams

Request a demo and we’ll show you around your Playroll dashboard. Without paying us a cent you can start planning new overseas hires with Playroll’s HR Cost Calculator and Country Encyclopedia.

Then we’ll have a serious conversation about where you want to grow global teams and how we can steward that journey, avoiding tons of hidden PE risks as we go.