Permanent establishment abroad
Do you have a permanent establishment abroad? Or: Do you know whether your activities abroad also result in foreign tax liability?
If you are or become active with your company in a foreign country and you do not assess the tax consequences, the tax authorities of that other country may be at your doorstep with a notification that your activities are considered a permanent establishment (Vaste Inrichting (v.i.) in Dutch) in the other country.
What is a permanent establishment?
If you have a permanent establishment abroad, this means, among other things, that profit or corporate tax must be paid on the profits earned from the activities of the permanent establishment. Of course, in order to determine profits, financial records must be kept separately from those in your home country. A permanent establishment is actually a structure for the tax authorities that can be applied to determine other types of tax.
The term permanent establishment suggests something tangible (an office, a storage room, etc.), but nothing could be further from the truth. It is a term used in tax laws and regulations and is defined as follows:
“a permanent operational structure in which all or part of the business of the enterprise is carried out.”
The definition is found in all double tax treaties that countries have concluded with each other. It is so general that it is difficult to deduce from it which activities are or are not considered a permanent establishment.
Criteria of a permanent establishment?
In addition, the interpretation of the term permanent establishment, i.e. when does the tax authority in a particular country considers it to be a permanent establishment, is different in almost every country.
An example of a permanent establishment in Belgium
The Belgian tax authorities ruled that a Dutch company had a permanent establishment in Belgium. The company placed vending machines in swimming pools from which visitors could purchase swimming caps. That vending machine of the Dutch company in the swimming pool in Belgium led to the conclusion that the company had a permanent establishment in Belgium.
An example of a permanent establishment in the Netherlands
A Dutchman, married to a resident of Belgium, trades in used army equipment and sources his trade primarily from the United States and the United Kingdom. The spouse in Belgium also has a sole trader company, and part of the procurement of army equipment is through her VAT number. The Dutchman structurally has a warehouse available in the Netherlands from which deliveries are made. Purchase and sales invoices are also routed through the Netherlands.
The Dutchman now lives with his spouse in Belgium but received additional income tax assessments from the Dutch tax authorities. The Dutchman, now residing in Belgium, argued that he was not taxable in the Netherlands because he conducted his business from Belgium. However, the Dutch tax authorities found that he was operating his business from a permanent establishment as a foreign taxpayer, and thus remained taxable on the profits attributable to the Netherlands. The court ruled in favour of the Dutch Tax Authorities.
Is there also an establishment that is not permanent?
Yes there is, and this is referred to by the term ‘non-permanent establishment’. Tax treaties define when a company’s activities abroad result in tax liability in that country. In addition, many treaties also explicitly mention certain activities (as, for example, in Art. 7 of the new Belgian-Dutch Tax Treaty) that do not lead to a permanent establishment, provided that they are of a preparatory or auxiliary nature. However, the interpretation of such definitions is not 100% clear, nor is the new treaty as yet fully specified.
Either way, we advise you to be very careful and preferably, if you are or will be operating your business abroad, to check in advance whether your activities in that country could result in a permanent establishment and what the tax consequences might be accordingly.
After all, every situation is different and is assessed based on the specific facts and circumstances. In general, having your own salaried representative abroad does not immediately lead to a permanent establishment, as long as you stay within a certain range, such as selling and delivering from the country of incorporation to customers abroad (although a country such as France has always been very critical of this aspect, and it is expected that other countries will not be so ‘accommodating’ in the future either).
If the representative is acting under a power of attorney that you have issued, allowing the representative to sign contracts in your company’s name with clients abroad, there is already a significant chance at this point that a permanent establishment will be determined, resulting also in liability for income tax abroad.
How do you find out if your activities lead to taxation abroad?
If you would like to learn more about the implications of personnel in different countries, download our series of Factsheets on personnel abroad below:
With our permanent establishment check, we help you identify the risks and inform you on the possible consequences and next steps.
Does anything change abroad?
Then be sure to recheck whether or not a permanent establishment arises. For example, if you decide to rent business premises, allow your foreign employees to work from home, give your employees abroad the authority to independently enter into contracts with customers, or hire a CEO who lives in that other country, it would be a good idea to complete the check again.
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