Permanent Establishment Risk & A Remote Workforce
Permanent Establishment risk is a concern for companies hiring remotely today. While it is good to be aware of the risk, it is not insurmountable. We’ve put together the key things to watch out for and how to tackle them.
Among all tax regulations, Permanent Establishment (PE) poses one of the most common risks for global businesses. Though more and more companies are hiring remotely, going remote, or starting up as remote-first businesses, Permanent Establishment regulations still pose a stumbling block for seamless remote employing.
Permanent Establishment (PE) does what it says on the tin - it means the tax authorities consider you to have a permanent set up in their country and therefore you have to pay corporate tax on the revenue you generate in that country. However, the devil is in the detail and understanding permanent establishment risk is the key to reducing it - companies can have remote employees in a country without creating a PE if it is carefully managed.
Omnipresent isn’t a tax firm, but we do pride ourselves on living and breathing the issues our clients face - in this case literally, since Omnipresent is a fully remote company with people across 7 countries globally! With that perspective, we consider ourselves well placed to help share our experience and insights so you can make the best decisions for your business.
What is Permanent Establishment?
The OECD provides the global standard definition for Permanent Establishment, meaning:
“a fixed place of business through which the business of an enterprise is wholly or partly carried on”
It sounds like you’d need an office or a factory, and some of your own employees to create PE … but of course it isn’t that simple. Those things would definitely create a PE, but the definition is generally interpreted more broadly and could include agents (i.e. third party companies you engage to do sales and marketing or business development in a new country for you), contractors, or even workers hired through an Employer of Record (EOR). It all depends on what you are doing and what the outcomes of those activities are. Ultimately it is down to the discretion of the local tax authority and each country has its own interpretation.
Lots of businesses work internationally without creating PE. The risk starts to increase significantly though when you have people working for you who are permanently based in that country.
You’re probably thinking: well, this is not much of a definition. Permanent Establishment could be defined as anything. This all comes down to the fact that countries and local tax authorities define PE in their own terms. But there are certain common triggers of Permanent Establishment that can help us understand – and avoid - it better.
The most common activities to watch out for include:
- Having an office or other fixed place of business (warehouse, factory etc.)
- Having someone based locally (a contractor, agent or employee via a Professional Employer Organisation - PEO) who:
- has authority to sign contracts on your behalf (this can be a contractor, agent, or someone hired via a PEO); or
- has an executive or senior management role; or
- undertakes sales activities.
Sales activities can be pretty broad and not all of them will automatically create a PE. Generally speaking people doing general business development, introductions and lead generation work will be low risk, while anyone closing deals, or making direct sales (whether this is of products or services) will be very high risk.
On the other end of the spectrum, the following activities will usually be low risk:
- Business trips to a country; or
- Engaging a local supplier or having a local customer; or
- Having workers in a country who perform supporting, but non-revenue generating activities.
For most businesses “supporting” activities would be roles within accounts, finance, legal, admin, marketing, PR, design etc - assuming of course that you aren’t an accounting firm, law firm or design agency! If you are a tech company you might want to think carefully about engineers. If you sell your software, and this is the main product your business has, your engineering team are essentially “manufacturing” your product, but they aren’t technically selling it, so whether or not the law considers this “revenue generating activity” is a bit blurry. We would recommend getting specialist advice on this one.
One Definition To Rule Them All? Sadly Not.
While the OECD has set the standard, and provided some helpful ground rules, different countries still define Permanent Establishment differently, and some more differently than others, so it is critical that you get local tax advice before deciding how to proceed.
Chinese PE regulations are a telling example of the role local definitions play. There are a number of different types of permanent establishment. A PE triggered by a fixed place of business, for example, applies to all companies conducting activities physically and permanently in China. In this case, permanence is not clearly defined, leading to considerable confusion.
Most applicable to global B2B and SaaS companies is China’s definition of a service Permanent Establishment. This applies to companies providing services including technology, engineering, IT, management or consultancies. If your company falls within the remit of this provision, any activity happening in China for more than 183 days can be classified as a PE presence.
Due to Covid-19 and the prevalence of remote and home working, the local authorities in China have communicated how companies should interpret tax regulations and definitions of Permanent Establishment under the current conditions. They concluded that temporary remote working will not trigger the presence of a PE, as long as the intention for permanence is not given.
China’s case shows how susceptible companies are to local definitions of PE. Increasing instances of remote hiring or companies going fully remote are further complicating the situation.
How Does Omnipresent Fit?
Under Omnipresent’s Employer of Record structure your chosen person will be legally employed by a company in the country they are living and working in. This will either be Omnipresent or our local partner. This local entity is fully registered with the authorities and pays corporate taxes, as well as contributing fully to the employees social security, and ensuring the employee’s income taxes are paid according to local law. This doesn’t mean that as the client you have no PE risk. You are still the company getting the benefit of - or more literally in PE’s case the revenue from - the local employee’s work. But it does mean that the structure is fully compliant and the local authorities are already getting tax revenue from it (i.e. there is no attempt to have a “secret” presence in the country by using contractors or agents). This makes it a lower risk structure and one less likely to be singled out or penalised by the tax authorities.
More importantly, as a company that lives and breathes remote working our team is alive to the risks and will discuss this with you when you approach us with a potential new hire or employee transfer. We can talk you through the above, the critical triggers and give you an idea of your risk, so you will know when to seek expert support and can go into the arrangement with all the information you need.