Establishment and place of management

Permanent establishment and place of management: key terms in international tax law

What is a permanent establishment?

A permanent establishment is a fixed place of business where a company carries out all or part of its business activities. This includes, for example, offices, factories or workshops. The term plays a decisive role in the international business environment because it can have tax consequences. For a location to be considered a permanent establishment, it must be physically tangible and permanent.

Permanent establishment and its significance under tax law

The tax relevance of a permanent establishment lies in the fact that it can give rise to a potential tax liability in a country. If a company has a permanent establishment in a country other than the country of incorporation, it may become liable to pay tax there. The legislator introduced this regulation to prevent companies from avoiding tax obligations by cleverly choosing their tax domicile.

Difference between permanent establishment and place of management

While a permanent establishment refers to a physical location, the place of management refers to the place where management makes key business decisions. The place of management is closely related to the management level of a company. Although both concepts play an important role in determining tax liability, they are based on different criteria and have different implications.

Legal framework for business premises and place of management

Both national tax laws and international agreements, such as double taxation agreements (DTAs), stipulate the legal basis for permanent establishments and the place of management. The aim of these agreements is to Double taxation of companies and provide clear guidelines for the allocation of taxing rights.

Importance of the permanent establishment in international business

The concept of a permanent establishment is very important for globally active companies because it can give rise to tax liability in a country. Companies must therefore carefully consider where they maintain permanent establishments in order to minimize tax risks and comply with the applicable regulations. This is particularly true for companies that operate in countries where they do not normally pay taxes on income. Foreign income have to pay.

How do you identify a permanent establishment?

The authorities use various criteria to identify a permanent establishment:

1. Fixed business facility: The location must be physically present and permanently usable.
2. Activity: The company must carry out a business activity via the permanent establishment.
3. Use: The company regularly uses the location for business purposes.

Typical examples of business premises include offices, factories, workshops, but also construction sites and assembly work if they exceed a certain duration.

Avoidance of tax residency outside the country of incorporation

Companies can take various measures to avoid becoming tax resident in a country other than the country of incorporation. A clear separation of activities and a structured approach are essential.

Measures to avoid tax residency

1. Separation of activitiesThe company should clearly separate the work from any activities in other countries.
2. Management in the country of incorporationThe company should appoint a domestic managing director and make important business decisions in the country of incorporation.
3. Office and infrastructure in the country of incorporationIt is crucial that the company maintains a physical office in the country of incorporation.
4. Bank accounts and financesThe company should maintain its business accounts with banks in the country of incorporation.
5. Separation of workplacesIf the company sets up workplaces in other countries, it should clearly separate them from the corporate structure.
6. Documentation and contractsAll contracts and documents of the company should bear the address in the country of incorporation.
7. Travel and meetingsManagement should hold important business meetings outside of countries where the company does not intend to maintain a permanent establishment.

Digital presence and technological measures

1. Server locations: The company should host servers and cloud services outside the countries in which it does not operate. Tax residency wants to justify.
2. VPN and remote workingBy using VPN services, the company can secure the connection to servers in the country of incorporation.

Contractual and legal structures

1. Contract designAll contracts and legal documents of the company should state the address and jurisdiction of the country of incorporation.
2. Service contractsContracts should clearly define that the company provides the services in the country of incorporation.

Tax advice and compliance

1. Regular adviceThe company should regularly consult tax advisors in the country of incorporation and other relevant countries.
2. Tax reportsThe company should make all tax declarations and payments properly in the country of incorporation.

Practical implementation in digital management

1. Online meetings and communicationThe management team should conduct and document regular online meetings in the country of incorporation.
2. Digital signaturesIf the company uses digital signatures for documents and contracts, it can show that it has signed them from the country of incorporation.
3. Project management toolsThe company should use tools hosted in the country of incorporation to organize and document the work.

Conclusion

By implementing these measures, companies can ensure that they do not become tax resident in a country other than the country of incorporation. A clear separation of activities and careful documentation are essential. In addition, companies should always keep an eye on current tax law developments and, if necessary, seek expert advice in order to optimize their strategy with regard to permanent establishment and place of management.

Frequently asked questions (FAQs)

1. What is a permanent establishment? A permanent establishment is a fixed place of business through which a company conducts all or part of its business activities. This includes offices, factories or workshops.
2. What is the significance of a permanent establishment in tax law? The permanent establishment can give rise to tax liability in a country, making a company liable for tax in that country.
3. How does the permanent establishment differ from the place of management? While the permanent establishment refers to a physical place of business, the place of management refers to the place where management makes key business decisions.
4. What measures help to avoid tax residency in another country? The measures include the separation of activities, the management of the company in the country of incorporation, the use of resources in the country of incorporation and the avoidance of the use of resources in other countries.
5. Why are digital measures important for avoiding tax residency? Digital measures such as the use of VPN and the placement of servers in the country of incorporation show that operational management technically takes place in the country of incorporation, which helps to avoid tax residency.
6. Can a purely internet-based company be considered a resident at the location of the server? As a rule, authorities do not recognize the server location alone as the place of management. In the case of a fully remote company, the place of management could be the managing director's place of residence or another location where management regularly makes important decisions.
7. How does documentation help to avoid unwanted tax residency? By carefully documenting activities, decisions and travel, a company can prove that the operational management and business activities take place in the country of incorporation.