Understanding Risk Factors for Triggering Permanent Establishment

For businesses operating internationally, understanding the risk of creating permanent establishment (PE) in a foreign jurisdiction is crucial. Permanent establishment is a concept in international tax law that determines whether a business is subject to corporate tax in a particular country based on its activities there. The following summarizes key risk factors that can lead to triggering PE.

1. What is Permanent Establishment?

Permanent establishment is defined by the OECD as “a fixed place of business through which the business of an enterprise is wholly or partly carried on.”

With regards to businesses operating in the US, the above definition is the standard the IRS holds for classifying a US permanent establishment, characterising it as “a fixed place of business in the United States through which the foreign enterprise carries on its business.”

If the foreign entity is regarded as having a PE, its subsequent net income connected with its business operation in the US will be taxed accordingly.