Permanent establishment risk is the risk that a company creates a permanent establishment (permanent establishment) as a result of its business activities in a country other than the home country and thus becomes taxable. A permanent establishment can be an office, a warehouse or a production facility, but a person who works abroad can also be regarded as a permanent establishment under certain circumstances or establish it.

Workations and international business trips

Workations and international business trips also entail the risk that is already established in the destination country as a result of a professional activity during a stay at a permanent establishment. Local laws must be observed here. Indicators include (but are not exhaustive):

- the type of activity,

- the length of stay,

- Role/seniority/power of representation of the traveller

- Assessment of the durability of the place where the activity is carried out

Other indicators vary by country.

Permanent establishment risk and tax liability

If a company sets up a permanent establishment abroad, this may result in tax liability in the country concerned. The company then usually has to file a tax return abroad and pay taxes there. Tax liability can also have an impact on transfer prices, profit accrual and the exchange of information between the countries involved.

Avoiding the risk of permanent establishments

In order to avoid or at least identify permanent establishment risks in advance, companies should implement a compliance management system (CMS) for cross-border activities, which ensures that risks can be identified at an early stage or reported retrospectively.

For regular business trips or work assignments abroad, it is advisable to use an automated, software-supported CMS to identify and implement reporting requirements and certification, as well as risks.

conclusion

Permanent establishment risk is an important factor that companies should consider when doing business abroad. A high volume of employment and international business trips can quickly result in companies setting up a permanent establishment abroad and thus becoming taxable. Modern travel compliance automation systems can support this and reduce many hours of manual work and risks.

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