Permanent establishment rule is probably the most important rule in international tax planning which must be taken into account for every international legal arrangement. If company A is effectively managed from the territory of country B, the company A must have a permanent establishment (PE) for tax purposes in the country B. Permanent establishment means that the company A should report and tax all income in country B, since it is effectively managed from that country.
The risks associated with PE rule are mitigated either by creating an actual physical presence (office space, employees in the jurisdiction of incorporation) or by separating different functions of the company and allocating them to different subcontractors worldwide. In practice, PE is primarily relevant to low-tax companies which are managed from high-tax countries; therefore, it is extremely important to estimate what requirements might apply in your particular case prior to starting the process of legal structuring.
On the other hand, it is possible to benefit from the PE rule. If you own a company in a high-tax country, but you are managing this company from a low-tax country which has a treaty for avoidance of double taxation with the high-tax country (the country in which your company is incorporated), you might make use of the PE in the low-tax country. In such case, all income, attributed to this PE, would be taxed with lower tax rates, or not taxed at all, if the relevant tax rate is 0%. This way, the company would remain a tax resident in the high-tax country, meaning that it would be much easier to obtain desired banking services, eliminate reputational risks related to the jurisdiction of incorporation, etc., and, at the same time, pay taxes on most income in a low-tax country.
All permanent establishment requirements are covered by international tax treaties; however, different business models tend to require unique approach, and, in some instances, they might raise more questions rather than provide answers. To ensure that there are no deficiencies, and all legal aspects are interpreted correctly, Nomad Law offers assistance from specialists with extensive legal background and experience in international tax planning. Drop us a message and we will contact you with the solution tailored specifically for your business model.
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