Permanent Establishment (PE) is a concept in international taxation that refers to a fixed place of business through which an enterprise carries out its business activities. A PE can be a branch, office, factory, warehouse, or any other fixed place of business where the enterprise carries out its business activities, either wholly or partially.
When an enterprise operates through a (Permanent Establishment) PE in a country other than its home country, it may become subject to the tax laws of that country. This means that the income generated by a PE is potentially taxable in the country where the business is located and in the country where the business is incorporated.
In brief, an organization will have a permanent establishment (PE) if any of the following applies:
1. The business has a physical presence in a foreign country.
2. The business is regularly present through employees or agents.
3. A sale is made from a fixed place of business.
4. The business is engaged in continuous and systematic activities in the foreign country.
Only income attributable to local activity should be subject to local tax, which can be determined through a profit attribution exercise. However, consideration must also be given to whether there is an applicable double tax treaty between the two countries.
Harmonization of tax laws has led to many countries adopting the Organization for Economic Co-operation and Development Model Tax Convention, which puts certain restrictions on when businesses will be considered permanent establishments (PEs) in another country.
Learn more by downloading our Free Permanent Establishment Management Control Guide.
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