What is permanent establishment?

Permanent establishment refers to a fixed place of business through which an enterprise carries out its business activities in a country other than its home country. It is a concept used in international taxation to determine the extent to which a company is subject to tax in a foreign country.

A permanent establishment can take different forms, such as a branch, an office, a factory, a warehouse, or a workshop. It can also include construction sites or installations for exploration or extraction of natural resources, as well as certain types of agents or employees who habitually exercise authority to conclude contracts on behalf of the enterprise.

Once a permanent establishment is established, the profits that the enterprise earns through the permanent establishment are usually taxable in the country where the permanent establishment is located, in addition to the country where the enterprise is resident. This is intended to prevent companies from artificially shifting profits to low-tax jurisdictions and to ensure that companies pay their fair share of tax in the countries where they operate.

There are several types of permanent establishment, which can include:

  1. Fixed place of business: This refers to a physical location where the business carries out its activities, such as an office, a factory, a store, or a warehouse.
  2. Construction site: This is a site where construction activities are being carried out, such as building a structure or installing equipment.
  3. Installation or drilling rig: This type of permanent establishment is commonly used in the oil and gas industry, where companies set up installations or drilling rigs in a foreign country to extract natural resources.
  4. Agency PE: This occurs when a person or a company is authorized to act on behalf of a non-resident enterprise, and habitually exercises the authority to conclude contracts on behalf of that enterprise.
  5. Service PE: This occurs when employees or other personnel of a non-resident enterprise provide services in a foreign country for a certain period of time.
  6. Dependent agent PE: This occurs when a dependent agent, such as an employee or a salesperson, habitually exercises authority to conclude contracts on behalf of a non-resident enterprise in a foreign country.

The specific criteria for determining whether a permanent establishment exists can vary depending on the tax laws of each country and the relevant tax treaty between the countries involved.

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