Permanent establishment

What is a permanent establishment?

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Permanent establishment

In the case of international employee assignments as well as cross-border employment, the question of establishing a permanent establishment in the employee's country of assignment is becoming increasingly important. With the new "remote working" concept, there is also an increased need to deal with this aspect.

In principle, a permanent establishment is understood to be a fixed local facility, branch, subsidiary, or office.

Possible operating sites may include:

  • Home of the employee ("RemoteWork")
  • Premises of the principal
  • Foreign construction and assembly
  • A permanent establishment may also be created by, among other things:
  • Provision of services for other group companies by local employees
  • Borderline cases for intra-group postings
  • Working for a client/customer over a longer period of time
  • Representative - Permanent establishment

In cross-border situations, however, the national law of the "permanent establishment state" must also be considered in addition to the provisions of the double taxation agreement.

The establishment of a permanent establishment entails that

  • a tax liability (company taxes) arises in the permanent establishment state
  • the taxation of the profits of the permanent establishment in the State of the permanent establishment
  • the accounting obligation arises
  • the sales tax obligations exist
  • the obligation to withhold wage tax and social security contributions

Permanent establishment risk

The tax administrations examine the different situations of cross-border activities much more closely regarding the existence of a permanent establishment.

The new opportunities and the flexibility experienced during the pandemic also mean that close attention is now paid to cases of "remote work".

What is the best way for a company to prepare?

It is essential to consider the issue of permanent establishment risk for any international employee assignment / cross-border employment.

Our premises check can be of great help in this respect. In doing so, we apply the following steps:

  1. Preparation of all facts based on our developed questionnaire
  2. Analysis of the situation and written statement
  3. Depending on the situation, point out possible avoidance strategies
  4. Examination of possible liability and sanctions for past years
  5. Assistance in the implementation of the establishment of a permanent establishment with regard to:
    Company level: tax, accounting, VAT, withholding tax, transfer pricing issues.
    Employee level: payroll, payroll tax, social security