The Pit of Permanent Establishment – Part 1
When technology businesses have exhausted the market in the UK, the next logical step is to start exporting services.
Exporting to EEA countries has its own challenges, including differences of language and sometimes also of culture, but exporting beyond the European Single Market may bring some more interesting additional legal and fiscal challenges, including the spectre of “permanent establishment”.
A “permanent establishment” is created by a business when it is sufficiently active in a particular jurisdiction for the local tax authorities to determine that the business is “trading in” that jurisdiction and therefore liable to comply with some or all local corporate, tax, fiscal and regulatory requirements, much as if it was a local company.
Creating a permanent establishment by accident (or even being accused of having created a permanent establishment by accident) is a situation to be avoided for at least these two key reasons:
- You will almost certainly have to appoint local tax advisers and accountants in country, either to try and prove that you have not created a permanent establishment, or to discuss next steps in terms of how you regularise your position; and the costs of that advice and support is likely to be considerably more costly in almost all cases than if you had taken the correct advice at the outset.
- Aside from the unforeseen professional services costs, you may find yourself in the position of subjecting your UK business to an intrusive audit by foreign tax and fiscal authorities, where (depending on how desperate the relevant country is for foreign tax dollars or how much you have already annoyed their representatives), they are likely to be poring diligently over your management accounts and other financial records with the sole purpose of identifying ways for their government to earn money from your business.
The good news is that as a technology business, you are not going to create a permanent establishment unless you are putting people on the ground in a country to provide or sell services, or you are importing goods into that country. If you are doing either of these things, then you need to think about better alternatives than walking blindfolded into the permanent establishment nightmare scenario. Typical alternatives might involve working with one or more local companies to distribute goods or services, or setting up your own local company and going for full local compliance.
In The Pit of Permanent Establishment – Part 2, I will look at getting local advice at the outset and putting a strategy in place that works for your business. I will also start to touch on the other bugbear for the unwary – withholding tax.