When employees perform work abroad, it can lead - sometimes sooner than expected - to an unintended tax presence: a permanent establishment. This arises not only from physical offices, but also from the activities, responsibilities and presence of employees.
It is important for HR to spot this in time, as international staff deployment can have direct implications for tax, registration and payroll obligations.
What HR managers need to know about cross-border employment
Companies operating internationally inevitably face complex, constantly changing tax rules. When employees work abroad, this can lead - sometimes unnoticed - to a taxable presence in that country: a permanent establishment. For HR managers, this is a major compliance concern, as it can have direct implications for payroll, registration requirements, social security and internal processes.
Exterus supports organizations in managing these risks. Below, we list the key principles in a convenient way.
What is a permanent establishment?
A permanent establishment occurs when a company has a tax presence in another country, without a legal entity being established.
Example: a Belgian BVBA that - due to its activities in the Netherlands - becomes liable for Dutch corporate income tax.
The concept exists exclusively within (international) tax law and aims to give countries the right to tax income generated within their borders by foreign companies. A permanent establishment arises independently of the incorporation of a local company. A legal entity in a foreign country is automatically subject to independent tax liability; on the contrary, a permanent establishment arises unintentionally through activities.
What does this mean for your organization?
When there is a permanent establishment:
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the company must apply for local tax registration;
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administrative and financial obligations may arise (e.g. local returns and reporting);
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HR processes may be affected, such as:
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local payroll tax or withholding obligation,
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personnel reporting obligations,
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employment or social security obligations.
Each jurisdiction has its own rules. Ignorance of these can lead to additional taxes, fines or reputational damage. Timely analysis is therefore essential.
When does a permanent establishment arise?
The answer varies by country. The assessment is always made on the basis of:
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The national legislation of the country in question.
Each country first assesses whether there is a taxable presence, or permanent establishment, based on its own tax laws. This means that:
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an activity in country A can constitute a permanent establishment,
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while the same activity has no consequences in country B.
This is important because employment contracts, salaries and social security sometimes need to be tailored to local tax qualifications.
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Tax treaty provisions.
When a tax treaty is in force between two countries, it provides for the distribution of taxing rights, avoidance of double taxation and clarification of the situation if both countries suspect the presence of a permanent establishment.
A tax treaty cannot create a permanent establishment when one does not exist under domestic law. However, it can tighten or relax the criteria.
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No treaty?
If no treaty exists between two countries, the Netherlands - and many other countries - usually adhere to an explanation in accordance with the OECD model treaty. The OECD standards are seen worldwide as the standard for assessing a permanent establishment. They are also the basis for the main rules and exceptions.
Main rule according to tax treaties
A permanent establishment arises when three cumulative requirements are met:
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there is a place of business (a physical facility or location);
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this place is fixed (permanent and available to the enterprise);
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the enterprise conducts business there.
The following locations are examples of locations that may constitute a permanent establishment:
Note that even with these examples, the three main requirements must still be met. 'Permanency' generally can be considered to exist when the period exceeds a minimum of at least 6 months. For a building site, or construction- or installation projects most treaties have a specific period; usually this is at least 12 months, although in some treaties a shorter period has been agreed upon.
Exceptions
Certain activities do not constitute permanent establishments, provided they are of a preparatory or auxiliary nature. Examples are:
Note: sales representatives can also constitute a permanent establishment
Many organizations first deploy one or more sales representatives abroad even before opening a local branch. It is precisely this that brings risks.
In fact, a dependent representative can create a permanent establishment when he/she:
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acts on behalf of the company,
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is not acting independently,
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is authorized to enter into contracts (or in practice takes the main steps to do so).
Since the 2017 OECD update, the threshold is lower: representatives who formally act in their own name but actually work at the risk of the foreign company can also form a permanent establishment.
Practical risk for HR:
Sales staff or project managers abroad may unknowingly create a local tax liability, with consequences for payroll, remuneration structure and reporting obligations.
Dutch extension: work on the continental shelf
In addition to the international rules, the Netherlands has its own extension: work in or above the North Sea mining area.
Is there work on the continental shelf for 30 days or more? Then this is considered a taxable presence by the Netherlands.This provision is included in many tax treaties with the Netherlands, often in a separate article.
Some practical examples of how a permanent establishment is often unintentionally created in practice
A. An employee structurally works at a fixed location abroad
This is the most classic situation. Consider:
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an employee who works from a customer location on a long-term basis,
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a project manager operating from a project location abroad,
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a consultant using a client office space.
If that location is permanently available to the company, that may be enough to create a permanent establishment.
B. Employees perform core tasks of the enterprise abroad
Core tasks are activities that contribute directly to the core of the business model, such as:
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sales activities,
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project execution,
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customer service,
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R&D activities.
When such activities take place abroad, the likelihood of a permanent establishment is significantly higher than for supporting or preparatory activities.
C. Long-term postings or secondments.
When employees stay abroad for longer periods of time (e.g. > 183 days, but sometimes shorter depending on the country), this can lead to local payroll tax liability, social security issues and potentially: permanent establishment risks.
Note that the "183-day rule" is not part of the permanent establishment concept, but may indirectly contribute to a risky situation. See also our blog regarding the 183-day rule.
Conclusion
The risk of a permanent establishment arises sooner than many organizations expect - even without a physical establishment abroad. HR plays an importat role in this, as cross-border employment is often the first trigger for foreign tax presence. Furthermore, the presence of a permanent establishment may have fiscal consequences; the 183-day rule is not applicable and employees usually become taxable in the country where they work as of day one. Different taxation of your workforce may significantly affect your financial results and can make the difference between green or red figures for your foreign assignment or even an entire foreign project.
Exterus helps HR and finance teams identify these risks early and manage them correctly. Feel free to contact us at tax@exterus.nl or book an introductory meeting today!
