Permanent Establishment Risk
What is a permanent establishment?
Income tax treaties of developed
countries typically include standard
language defining the term permanent
establishment that is based on the OECD
Model Income Tax Convention.
Examples of permanent
establishment risk
•Employment of a senior sales person
overseas with authority to conclude
contracts in the name of the UK
principal
An enterprise of one country will generally
have a permanent establishment in the
other country if it has either a fixed place
of business (e.g. a place of management,
a branch, office, factory, etc.) in the
other country or it has a dependent
agent in the other country who has the
authority to conclude contracts binding
the enterprise, and the agent habitually
exercises that authority. It is irrelevant if
the contract is signed in the home country
– if the contract has been concluded in
substance overseas, then a permanent
establishment risk will remain.
•Sending a team of UK based individuals
to deliver a project where that project
lasts more than 12 months
Although the definition is standardised, it
is quite general and countries vary as to
how they apply it to various fact patterns.
There are a number of frequently asked
questions:
•How long must an overseas presence
exist before it creates a permanent
establishment?
•Can an employee’s home create a fixed
place of business?
•Does performing services for a
customer in its offices create a
permanent establishment?
•Does the presence of an independent
contractor create a permanent
establishment?
•How are the permanent establishment
rules applied to the internet economy?
Contact us
If you would like information or advice
on how we can help you, please contact:
Stuart Rogers
Head of International Services
Corporate Tax Director
[email protected]
T 01823 275925
What exemptions are available?
The OECD definition of a permanent
establishment provides for two
exemptions:
•if the permanent establishment is a
fixed place of business the definition
provides that it will not be treated as
such if its activities are restricted to
storage, display, information collection,
or anything else that is preparatory or
auxiliary in nature
•if an agency relationship is under
consideration then it will not be
considered to be a permanent
establishment where there is an agent
of independent status – that is to say
legally and economically independent
We are advising increasing numbers of UK
SMEs on the management of permanent
establishment risk as their businesses
expand abroad, foreign projects are won,
and overseas employees are taken on.
What is the permanent establishment
tax risk?
It is the risk that an enterprise will be
subject to tax in another country as a
result of conducting some activities in that
country. This gives rise to an obligation
to file a tax return and pay taxes in that
country. Failure to do so will ordinarily
result in interest and penalties.
For information of users: This material is published for
the information of clients. It provides only an overview
of the regulations in force at the date of publication,
and no action should be taken without consulting the
detailed legislation or seeking professional advice.
Therefore no responsibility for loss occasioned by any
person acting or refraining from action as a result of
the material can be accepted by the authors or the
firm.
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