With companies expanding internationally, global mobility compliance for remote workers abroad has emerged as a critical concern for owners and business heads. CEOs often adopt hiring talent in foreign markets as a strategy to accelerate growth and innovation. However, this move also inadvertently exposes organizations to tax obligations in those jurisdictions.
One of the key risks for globally expanding companies today is the triggering of a permanent establishment (PE). This invites fresh expenses for an organization in the form of local corporate taxes.
Even short-term assignments between 3-5 months can create a taxable presence, unless the matter is professionally managed. MNCs worldwide must understand the norms associated with PE and implement strategic measures to safeguard their interests. The IMC Group continues to be a reliable partner for businesses establishing their presence globally, ensuring compliance.
What is Permanent Establishment?
As a critical concept in international tax laws, a permanent establishment refers to a situation where a business is considered to have a stable and growing presence in a foreign country. As a result, the organization needs to pay local corporate taxes. Even if an organization hasn't established its legal entity within that jurisdiction, the presence of its employees beyond the borders can invite such taxes.
Typically, a PE may arise from:
- Fixed place of business: A physical office, warehouse, or factory used regularly for business operations.
- Dependent agents: Employees or representatives who habitually conclude contracts on the company's behalf.
- Service-based activities: Providing services abroad for a sustained period, often exceeding a few months.
Countries follow OECD and UN model conventions, but local rules vary. Activities considered preparatory or auxiliary, like short-term consulting or minor administrative tasks, usually do not trigger PE. However, businesses bear the burden of proof to demonstrate that these activities are non-core and non-revenue-generating.
Types of Permanent Establishment to Watch
CEOs and business owners must understand the different types of permanent establishments.
- Fixed Place PE: This type of PE occurs when a company maintains a location abroad through which its business is conducted. Regular use of office space, client meeting rooms, or even a dedicated mailing address can increase risk.
- Dependent Agent PE: If an employee or agent in the host country has authority to negotiate or conclude contracts, they may create a PE. This risk exists even if the agent is part-time or only occasionally involved in deals.
- Service PE: Providing professional services in a foreign jurisdiction for an extended period, often exceeding 183 days per year, can trigger a PE.
Virtual PE: With remote work becoming widespread, a "virtual" presence, where employees regularly work from another country without a physical office, may still be scrutinized by tax authorities.
The Caterpillar-India Case – A Real-World Example
A notable example involves Caterpillar and its Indian subsidiary, Progress Rail Locomotive Inc. Despite the subsidiary providing support services to the parent company, India's High Court ruled that no PE was triggered. Key factors included:
- The activities of the subsidiary were preparatory and auxiliary, not a core part of the business.
- No contracts were concluded by Progress Rail on behalf of Caterpillar.
- The parent company did not maintain control over the subsidiary's premises for core business purposes.
This case demonstrates that even if an organization has its local entity, the PE risk is not automatically eliminated. MNCs, therefore, must continually evaluate norms in foreign markets to avoid unintended tax exposure.
Activities That Increase PE Risk
Here are some activities that might potentially trigger the risk of PE:
- Frequent visits to client sites where revenue-generating work is conducted.
- Managing employees abroad without clearly defined auxiliary or preparatory tasks.
- Regular negotiation or conclusion of contracts in a foreign jurisdiction.
- Establishing offices or permanent workspaces used to expand the primary activities of the business.
Even limited activities, like the ones involving a sales manager visiting a client in the UAE multiple times, can lead to a PE, unless the process is not structured professionally.
6 EssentialStrategies to Avoid or Mitigate PE Risk
The IMC Group recommends some essential strategies to address the risk of PE.
- Use an Employer of Record (EOR)
When a company employs staff through an EOR, it allows the organization to hire abroad without creating a local PE. The EOR is responsible for handling payroll, contracts, and compliance, which reduces direct exposure.
2. Limit Scope and Duration
Restrict foreign activities to short-term or preparatory tasks. Avoid assigning employees to conclude contracts or manage operations critical to the business.
3. Engage Independent Agents
Work with agents who cannot legally bind the company. Dependent agents with authority to sign contracts pose a higher PE risk.
4. Set Up a Local Entity if Necessary
If the operation is substantial or a long-term one, establish a subsidiary to formalize the legal presence and ensure compliance. However, this might bring full tax obligations.
5. Collaborate Across Departments
For HR and tax teams, it's imperative to track the assignments of employees and monitor their activities. They must also maintain documentation to demonstrate compliance and limit the exposure to PE.
6. Seek Expert Advice
Consider partnering with international tax specialists to assess PE risk. The professionals will guide you in reviewing local regulations and implementing preventing measures.
Professional Global Mobility Compliance Solutions For Multinational Companies
For MNCs, it's critical to understand PE risks and seek professional consultation to avoid unexpected tax liabilities and legal disputes. Reputational damage arising from non-compliance can trigger a major setback in global expansion. The IMC Group provides professionalglobal mobility compliance solutions for multinational companies, ensuring speed and compliance. With expert advisory solutions, businesses can strategically manage their workforce to reduce exposure. Experienced consultants can guide organizations regarding how they must assess cross-border employee activities and enforce clear guidelines. Successful businesses are already benefitting from these expert advisory solutions as they confidently expand to international markets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
