27 Apr Permanent Establishment
For business owners, expanding beyond the borders of the United States presents significant opportunities and benefits. The decision to enter foreign markets likely means the company is enjoying success. However, it is important to keep in mind that conducting business in other countries raises additional and unique risks over remaining a domestic company, including potentially significant tax implications. Here, we focus on permanent establishment as defined under the Organization for Economic Cooperation and Development (OECD).
OECD and Permanent Establishment
The OECD provides a forum for countries to work together to help improve the economic and social well-being of people around the world. There are currently 34 member countries of the OECD, including the United States. The OECD facilitates the formation of agreements between countries, the production of standards and models, including for bilateral tax treaties, and the creation of guidelines.
The OECD Model Tax Convention provides for clarity and uniformity in resolving issues related to international juridical double taxation. This occurs when the same taxpayer is assessed similar taxes in two or more states for the same subject matter and for identical periods. The OECD believes that this has harmful effects on the international business community.
Under OECD, a permanent establishment is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Permanent establishments include the following:
1. A place of management;
2. A branch;
3. An office;
4. A factory;
5. A workshop; or
6. A mine, an oil or gas well, a quarry or any other place that natural resources are extracted.
Additionally, a permanent establishment may be found if, in a foreign member country, a dependent employee acts on behalf of a company and habitually exercises an authority to execute contracts in the name of the company. However, a company does not have a permanent establishment in a country simply because it does business in that country through a broker, general commission agent or any other agent of an independent status, so long as those individuals are acting in the ordinary course of business.
Why does it Matter?
For business between member States of the OECD, a finding that a company has a permanent establishment in a foreign country is important because it may result in the company being subjected to taxation in that country. As a result, the company could face international juridical double taxation. Further, any employee in a foreign country may also be taxed by both the U.S. and the foreign country. While it may be possible for the employee to receive a refund from the U.S. government, the employee will still have the burden of paying these taxes upfront. So long as the company does not form a permanent establishment, the company and its employees abroad are generally only subject to U.S. tax.
Protect your Company
As you consider entering a foreign market, it is important to keep in mind that there will be additional tax issues to be aware of. If you would like more information about the tax implications of expanding your business globally, contact the experienced attorneys at the Royse Law Firm today.Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.