Permanent Establishment (PE)

‍

Risks in Cross-Border Travel Compliance

Permanent Establishment (PE) is becoming an increasingly important topic in a world where remote work and cross-border employee mobility, including workations and business trips, are prevalent. Mismanaging PE can result in significant administrative burdens, monetary penalties, and fines for your company. Nevertheless, the risks should not discourage your employees from engaging in business trips abroad or benefiting from temporary working abroad.

In this article, we explore the PE risks associated with workations and business trips, and discuss strategies to mitigate these risks during the employees’ stay abroad.

‍

What is a Permanent establishment?

A permanent establishment (PE) is a fixed business location used to carry out company activities outside the company's home country.

There are several types of Permanent establishment, for example:

• Fixed place of business PE: a physical location or premises in a foreign country that the company uses to execute significant business activities (for example, an office).
• Dependant Agent PE: occurs when an employee or an entity habitually concludes contracts or negotiates them exclusively (or almost exclusively) for the foreign enterprise (the PE).
• Service PE: a situation when an employee provides services from a foreign country on behalf of the home country’s entity for a specific period of time.
  • Unlike a fixed place PE, a service PE can be established based on the presence and activities of employees over time, even without a physical location for business activities.
  • Unlike a dependent agent PE, a Service PE is based on the duration and nature of service activities performed in the host country, instead of authority to conclude contracts.

Temporary work arrangements abroad, such as workations and business trips, carry a risk of constituting a PE if not managed correctly. The existence of a PE is determined based on certain criteria set by local authorities, which vary from country to country. Therefore, to mitigate the risk, it is important to assess the risk of constituting a PE on a trip- and employee profile-specific basis.

‍

What’s the risk of creating a PE during a temporary employee presence abroad?

Permanent Establishment Risk in Workations

‍

As the name suggests, Permanent Establishments contain a certain level of permanence in business activities abroad. Since temporary workers abroad (in this case, workationers) do not meet the criteria of being "permanent," and given that a workation is generally a temporary work abroad arrangement, it typically does not meet the threshold required to constitute a PE.

Both the OECD and the UN, whose tax treaty models are widely adopted, support this claim. They state that a 'fixed place of business PE' and a 'service PE' are generally not established if the presence in the other country is less than 183 days within a 12-month period. Meanwhile, if the international stay exceeds the 183-day threshold, it does not qualify as “temporary” anymore, and other regulations start to apply.

However, even with a temporary presence abroad, there is a risk that employees could create a 'dependent agent PE'. According to the OECD and UN, a 'dependent agent' is an employee who regularly plays a significant role in concluding contracts. The term ‘regularly’ typically implies a specific frequency, such as concluding five contracts where the individual played a leading role.

Therefore, it's theoretically possible for a dependent agent to establish a PE even during a workation lasting as little as one day.

‍

Permanent Establishment Risk in Business Travel

Business trips involve employees traveling abroad specifically for work-related purposes, such as meeting clients or attending business events. The Permanent Establishment risk for business trips is higher, as the presence of employees in the host country may lead to the establishment of a PE if the company has a more substantial presence (e.g., frequent or long-term stays).

Factors such as the employee's seniority, role, authority to negotiate agreements, and the duration of stay are crucial in determining the likelihood of triggering Permanent Establishment taxation risks in the form of income tax, corporate tax, and VAT obligations in the host country.

Consequences for Companies if a Permanent Establishment is Created

If a company inadvertently creates a Permanent Establishment (PE) in a foreign country, it triggers several legal and financial obligations. These can include:

• Income tax obligations ranging from 20% to 35% on attributable profits
• Registration with the local authorities and tax filings for corporate tax, VAT, and other duties
• Penalties for failure to comply with registration or filing requirements
• Late fees for delayed tax payments
• Damage to the employer brand and reputational risks

Failure to handle these obligations can result in both financial and non-financial repercussions.

How to Handle Permanent Establishment Risk During Work From Anywhere and Business Trips

To mitigate these risks, employers should assess the employee’s trip and profile, considering the following factors:

To assess and mitigate the risk of creating a Permanent establishment, employers should consider the following information about the employee and their trip:

• Reason of stay (eg, privately initiated work from anywhere trip or a business trip)
• Duration of the trip
• Previous travels within the specific country over the last 12 months
• Employees' activities performed while abroad
• Tax payments

Depending on the nature of the trip and the activities to be performed from the destination country, the risk can highly increase (i.e., negotiating contracts would involve a much higher risk than conducting business support activities).

Additionally, the duration of the stay is also key as exceeding certain time limits, 183 days over a running period of 12 months, could lead authorities to conceive a PE. For this aspect, it’s important to consider previous trips in the country as accumulated duration may be taken into account when evaluating the establishment of a PE if it has been triggered.

‍

WorkFlex approach of managing PE risk during workations

While workations and business trips do possess risk of creating a PE, it can be successfully managed and should not discourage employers and employees from these cross-border activities. To assist companies in managing this risk, WorkFlex has developed an advanced risk assessment framework.

For each employee trip, WorkFlex evaluates factors such as the employee’s role, seniority, authority to sign contracts, length of the trip, and other relevant details. Considering employee-specific factors and destination specifics, WorkFlex determines the potential risk of creating a PE.

As a result, employers benefit from a comprehensive overview of the PE risk, implementation of risk mitigation measures, as well as the WorkFlex’s no-risk  concept, which assumes liability in case any potential risks materialize during the trip. To delve deeper into the logics behind PE risk assessment, book a free consultation with the WorkFlex team.

‍

Conclusion

Permanent Establishment (PE) is an increasingly critical consideration in today's landscape of remote work and cross-border employee mobility. Mismanaging PE can impose significant administrative burdens, monetary penalties, and fines on companies. However, if properly managed, it is not an obstacle for international business trips abroad or temporary work-from-anywhere benefits to employees.

We have explored the risks associated with PE during workations and business trips, emphasizing the importance of proactive risk assessment and mitigation. By evaluating factors such as the nature of the trip, duration of stay, and employee roles, companies can effectively manage PE risks and navigate international tax compliance requirements. This proactive approach not only safeguards against potential liabilities but also enables organizations to capitalize on global mobility opportunities responsibly.

‍

‍

Deep-dive articles about Permanent establishment:

• There's no "permanent" in temporary work from abroad
• Compliance topics around workations
• Unlocking the hidden costs of unmanaged business trips