When expanding internationally, it’s tempting to jump straight in – after all, global markets are often full of opportunities.
But crossing borders without proper planning can expose your business to unexpected tax liabilities.
One such tax risk is triggering a “permanent establishment” (PE), which could mean tax obligations in another country.
Here’s a look at some common indicators that might lead tax authorities to conclude your business has a PE – and what you can do to manage the risks.
Maintaining a physical office or location
If your business rents or maintains office space in another country, even if it’s just a small room in a shared workspace, tax authorities could consider this a PE.
Physical presence is one of the most obvious triggers for PE status, especially if it’s a place where you’re regularly conducting business.
Some countries may even consider a home office used by a remote employee as enough to constitute a PE.
To avoid this, it’s worth considering whether a fixed location is truly necessary.
If having a local office is essential, setting up a separate entity or branch may help you better control your local tax obligations.
Alternatively, you might explore remote or virtual solutions to avoid the need for a fixed physical presence altogether.
Employing staff abroad
Having employees based in another country is a significant indicator of PE, particularly if these staff members are performing essential activities like negotiating contracts or generating sales.
A local hire representing your brand could easily be viewed as establishing your presence in that country, which may lead to local tax obligations.
To reduce this risk, carefully define the roles and responsibilities of any staff based abroad.
Limiting their responsibilities to supportive, rather than sales-oriented, functions can help minimise your exposure.
If your foreign staff must engage in critical business activities, consider options such as employing them through a local entity or contractor arrangement, where feasible.
Signing contracts abroad
Contracts are another hot topic in the world of permanent establishment.
If your team is signing contracts in a foreign country, this is often a surefire way to trigger PE status, especially if these contracts involve revenue-generating activities like sales or project work.
Signing contracts locally demonstrates that you’re engaging directly with the market, which may prompt tax authorities to claim you’re operating locally.
To mitigate this risk, it’s advisable to keep contract-signing activities in your home country.
Ensure that any employee abroad does not have the authority to finalise contracts independently, without approval from the main office.
Alternatively, you might consider using electronic signatures and finalising agreements from your home jurisdiction, rather than in-country.
Providing services on-site for extended periods
If you’re sending employees or contractors to provide services in another country, particularly over several months, you may be establishing a PE under “service PE” rules.
Many countries impose a time limit, typically between six and twelve months, after which they will consider you to have a local establishment.
To avoid crossing this threshold, keep track of time spent by your staff in each country.
You might avoid PE by rotating team members or limiting their time on-site, especially for extended projects.
Shorter, well-defined project durations are also helpful in managing this risk.
Warehousing goods in another country
Storing goods in a warehouse abroad, especially if you’re selling these goods directly to local customers, could be seen as having a PE.
While some tax treaties allow warehousing without triggering PE, this area can be grey and open to interpretation by authorities who may view it as establishing a physical presence.
Consider logistics options that keep your goods close to customers without establishing PE, such as third-party fulfilment centres or distribution partnerships.
If warehousing is essential, consult with a tax adviser to determine the best structuring options to minimise PE exposure.
Using dependent agents to conduct business
If you’re using agents, distributors, or other representatives to carry out business in another country, certain arrangements could constitute a PE.
Specifically, if these agents regularly negotiate or conclude contracts on your behalf, tax authorities could argue they’re effectively an extension of your business.
It’s often beneficial to engage independent agents, rather than dependent ones, where possible.
Independent agents are generally not considered part of your establishment, particularly if they work with multiple clients.
To strengthen this arrangement, ensure they have operational independence and are not exclusively representing your business.
Repetitive and ongoing business activities
One-off or irregular transactions abroad are less likely to create a PE.
However, if you’re conducting business regularly in a foreign market – attending trade shows, meeting clients, or holding recurring events – it becomes harder to argue that you don’t have a presence there.
Repetition and consistency can signal a lasting presence to tax authorities.
To manage this, limit in-country activities to what’s strictly necessary and vary your approach.
For instance, consider virtual meetings to engage with international clients and save physical events for truly significant occasions.
Local advertising and marketing efforts
A sustained marketing campaign targeted specifically at a foreign market could also be interpreted as a local presence, particularly if you’re using local media channels, sponsoring local events, or displaying a prominent presence in a specific location.
Consider keeping your marketing activities digital and broad-based, as this may help avoid the appearance of targeting a specific region.
If on-the-ground promotion is essential, explore partnerships with local companies to jointly promote your brand in a way that keeps your own presence indirect.
The line between maintaining international flexibility and accidentally establishing a PE can be surprisingly thin.
Each country’s approach to permanent establishment is unique, with tax treaties and local rules introducing their own nuances.
So, if you’re taking your business global or expanding your presence, it’s worth seeking advice from an international tax adviser who can help you navigate the complexities and avoid costly tax surprises.
