Running Towards Permanent Establishment Tax Risk

Permanent Establishment The Top Remote Work Risk For Global Mobility Leaders

In the recent work from anywhere white paper released by the The Work From Anywhere Team, The Global Mobility Executive and RoRemote, Permanent Establishment (PE) came up as the number one risk for companies when it came to remote work.

This can have an enormous impact on companies as if they trigger PE, they then have to pay corporation tax on any profits they generate in that country, so understanding the PE risks is crucial.

Quick Permanent Establishment Definition Recap

Permanent establishment is a situation when your company triggers a taxable presence in a country.  

Triggering such a presence can mean that the country in question can charge corporation tax on your company’s corporation tax profits in that country, amongst other issues, so the consequences of this can be wide-ranging and extremely expensive if not carefully assessed.

While it is true that there can be a degree of variation across different countries, there are some general principles that underpin many permanent establishment risks around the world.  The activities below are typically ones which can give rise to permanent establishment.

1. Let’s say you have a senior director of the company who wants to work in their holiday home in the south of France.  If they are making strategic decisions and taking board meetings in that country, then this may give rise to permanent establishment risk.
2. Another trigger is if you are sending sales-generating employees abroad.  For example a number of your sales team want to work abroad in Greece for a few months, this would likely be an extremely high risk for permanent establishment if combined with the first point above.  
3. If you have agents who conduct business on behalf of the company and/or they have decision-making power to act on behalf of the company (e.g. signing customer or employee contracts), then this is another important trigger.  This is especially true if you have contractors.  Some companies feel by hiring people as contractors that this negates any tax or legal risks but this could not be further from the truth.  Aside from contractor misclassification risks, if those contractors have decision-making authority or can act as agents on behalf of the company, then you can immediately trigger permanent establishment risks.
4. If you have a fixed place of business in the country, this can also create a permanent establishment.  How a fixed place of business is defined can vary depending on the country, but just because you don’t have an actual official company office in that country doesn’t necessarily mean you don’t have a fixed place of business.  If you have remote workers regularly working from one location, say a co-working space, and conducting business there over a long period of time, this may by itself trigger the fixed place of business risk.
5. The length of time side of the equation is also critical here.  If a company has an infrequent presence in the country, for example by sending remote workers abroad only a few days a year for a limited time, then this is unlikely to raise significant permanent establishment risks.  However, if the company has had a long-term, frequent presence in that country, then the risk will be elevated.  From a work from anywhere perspective, sending a few people abroad on remote work trips for less than 30 days are highly unlikely in most countries to trigger a permanent establishment risk.  However doing so for 4 months a year on a regular basis would be a different matter altogether.
6. Services permanent establishment is another potential trigger.  What this means is that a significant presence of back-office employees (e.g. Finance or R&D teams, to name but two), especially when combined with one or more of the above, may be another risk to consider.
7. Virtual permanent establishment is another new emerging concept that companies have to contend with.  This is where, through digital activities (e.g. anything from ecommerce sales to hosting services and data warehousing) in a country, the company creates a digital presence.  If combined with any of the above items, this heightens the risk of permanent establishment.

Turning Permanent Establishment Risk Into An Opportunity?

As it has been explained above, PE issue is a very complex matter that, although it has common roots, may vary from country to country. In fact it is not a clear-cut issue so, in some situations, the risk cannot be fully mitigated.

Considering such circumstances, we are of the opinion that an alternative approach can be to embrace the PE issue and take advantage of the PE status in tax friendly jurisdictions. To take just one example, this approach can be implemented in the Canary Islands (Spain) through its ZEC tax regime.

Key Features of the Canaries ZEC Regime

Although the Canary Islands is part of Spain, this territory has special tax incentives approved by the European Union (EU) due to its remote location from the Spanish mainland. 

The main features of the ZEC regime are the following:

• The ZEC regime is applicable to entities located in Canary Islands (Spain) and which carry out certain permitted business activities if certain requirements are met (mainly job creation of at least 5 full-time employees and a minimum investment of either €100,000 for Gran Canaria / Tenerife or 3 full-time employees and €50,000 investment in the rest of the islands).
• The ZEC entities would be subject to corporate income tax (CIT) of 4% in comparison to the 25% general corporation tax rate applicable in the rest of Spain.
• ZEC entities are entitled to claim treaty benefits from the Double Tax Treaties (DTT) concluded by Spain.
• ZEC entities have access to EU Directives.
• There is no Withholding Tax (WHT) on dividend payments to non-resident shareholders.
• There is no WHT on interest payments to non-resident entities.
• Capital duty is not applicable for standard company operations (i.e., incorporation, capital increases, capital decreases, etc.) except for the winding up of the entity (i.e., dissolution).

Taking the above into consideration, rather than running away from PE risk, companies might actually decide to embrace PE in the case of the Canary Islands by proactively setting up a branch or a company in the Canary Islands to take advantage of the taxation benefits of this regime.  The Canary Islands would then be added to one of the key destinations within a company’s work from anywhere policy.  Gran Canaria in this case Ranks 6 in the world on Nomadlist so it should be an attractive destination for employees.

When it comes to the position of the individual employees, there are also tax incentives to consider.  Spain offers the so-called in-bound manager regime which means that if an individual becomes tax resident in Spain and has come to this jurisdiction as a result of an employment contract with a Spanish company or a PE in Spain this person would only be taxed for the Spanish sourced income and wealth. In addition, employment income up to €600,000 would be taxed for Spanish Personal Income Tax purposes at a flat rate of 24%.

Spanish Startup Law

As a result of the new opportunities opened up by the global pandemic, Spain wanted to be a pioneer in responding to what Digital Nomads were looking for.

Therefore, at the end of 2021, Spain approved the so-called “Startups Law” project with the intention of attracting Digital Nomads by offering them a regulatory framework that facilitates their movement to this country by establishing a quick and simple procedure for these Nomads to obtain their visa and residency, as well as an attractive tax regime.

One of the core components of this law is that digital nomads can obtain this visa as long as they carry out an employment or professional activity for companies located outside Spain.

In addition, self-employed Digital Nomads can also work for a company located in Spain as long as the percentage of income from this work does not exceed 20% of their total professional activity. 

This “Startup Law” gives the Canary Islands an additional benefit on top of the ZEC regime above making it a very attractive location for both companies and individuals. One of the reasons it is already popular with remote works is the abundance of co-working spaces, an ecosystem of digital nomads, one of Europe’s largest remote working conferences (Repeople), a low cost of living as well as the good weather and countless socio-cultural, sporting, leisure and gastronomic activities.

Running Towards PE Conclusion

Part of the challenge for any global mobility leader today is trying to design a work from anywhere policy which offers attractive destinations to their employees whilst also minimizing the taxation and other risks associated with international remote work.  This is precisely why understanding the benefits of walking towards PE risks is something to consider as part of any geomobility policy.  

Walking towards PE risk can only work if there is sufficient demand for that remote working destination and the risks/costs associated with such a strategy make sense.  Which is why the Canary Islands is a useful case study to understand in more detail.  There are other destinations similar to the Canary Islands out there that can allow a company to walk towards PE risk, but very few rank so highly on digital nomad rankings such as Nomadlist, Momondo or Kayak.

Authors

• John Lee from The Work From Anywhere Team
• Edu Sánchez from Despacho Santelmo tax advisors.
• Jorge Barba Prage and Jose Batllori from Aguilar Abogados employment lawyers 

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John Lee

John is Co-founder of the Work From Anywhere team, a platform to help companies execute a hire or work from anywhere strategy.  John is a Chartered Accountant who speaks 6 languages and was previously the senior finance leader of a €4 billion division of FTSE-listed CRH Plc.  John and his family are passionate about travelling and his eldest daughter, Rosa, while only 5 years old has already travelled to 25 different countries.