How can permanent establishment reduce your tax liability?


Globalization has made it possible for every business owner to expand the business into new markets and across new countries. However, every country has different laws of the land and if you intend to take your business there, you need to adhere to the same.

You might suffer from double taxation if you conduct your business in a country that has no Double Taxation agreement with your resident country. It means you end up paying taxes in your country of residence as well as the country where you are conducting your business operations. Again, a double taxation agreement can harm the revenues of a country. This is why you need to understand the rules of permanent establishment before you expand your business into a new nation.

Every business owner needs to understand different ways in which the tax liability on the business can be reduced. Whether you intend to expand your business within the country or overseas, understanding the taxation system is a must. Double taxation and permanent establishment are interconnected. A double taxation agreement can help reduce the tax liability that may arise due to a permanent establishment in a specific country.

What does a permanent establishment mean?

In order to understand how to conduct business into a foreign country, you need a clear understanding of permanent establishment and this article explains the same. A permanent establishment is a place of business that gives rise to income or a tax liability in a specific jurisdiction. A lot of countries impose taxes only when an enterprise has a permanent establishment in the country concerned. It helps to put a threshold for the taxing source by limiting the tax on the source State and setting a minimum limit on the nature of the activity. It helps ensure that the company pays less tax for the revenue generated.

However, there are different requirements and duration for the same. This varies across different countries. While some countries may have a double taxation agreement, there are many others where you will have to pay tax and will not be able to reduce the liability. When it comes to the expansion of a business into a different country, it is essential to understand the double taxation agreement. If not, you will end up paying taxes in your home country as well as the foreign country where you take your business. Most business owners gain an understanding about the tax liability and agreement before establishing a permanent office in a new country. This is the first step towards expanding your business and taking it to the global level. You might also want to consider the prevailing rates of taxation in the country so as to gain insight into the amount that you will be paying as part of your tax liability.

Permanent establishment under different models

Different countries have different laws with regard to what a PE consists of and the minimum amount of time which is required for the establishment to be triggered. However, it basically means that there should be an existence of a place of business and it should have a degree of permanence. The business operations should be fixed from one particular place. Different models like US, UN, and OECD have similarities in defining the minimum time period. Under the OECD model, the minimum period is one year and in the UN model, the minimum period is six months. Keep the minimum period in mind before you establish as a business because it will heavily impact your business operations and tax liability.

Before you decide to establish a permanent establishment in a different country, you need to understand the minimum period and the auxiliary activities that are defined in the model. The benefit needs to be considered so that the double taxation agreement is thorough and clear. There are multiple differences between the models and this could impact the agreement and your tax liability. One of the most important aspects of a PE is the duration test and the states could decide up update their agreement with different states.

You might want to seek the help of a consultancy which will ensure that your business grows globally and does not face trouble with regard to double taxation in the home country and in the foreign country. Understand the laws of your land and the laws of the country you want to take your business to. Before embarking on a permanent establishment, you need to gain clarity about how it works and how it will benefit you.

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