Enterprises are becoming more and more international and more business is carried on cross-border. When carrying on business in another country the company may have a permanent establishment in that country which means that the company is usually liable to pay income taxes to that country of all the profits attributable to the permanent establishment. In addition, permanent establishment causes usually VAT, employer and registration obligations that need to be figured out as early as possible and preferably already before starting the business abroad.
Carrying on business abroad
Before starting business abroad, it is beneficial to consider in which form the business should be carried on. As a starting point, if the option of establishing a subsidiary is not chosen, the Finnish company should find out at early stage if it’s considered to have a permanent establishment abroad. Respectively, when starting to carry on business in Finland, the foreign company should find out if it is considered to have a permanent establishment in Finland.
There are many interpretative and uncertain issues related to permanent establishments. This is why many companies establish abroad an independent company. Important and challenging questions related to permanent establishments are e.g. 1) is a permanent establishment constituted, 2) how is the taxable income determined, 3) does the home state of the company approve that a permanent establishment is constituted and 4) how is double taxation eliminated.
However, in some situations a permanent establishment might be a better option compared to an individual separate company, despite of the uncertainties related to it. When choosing an option e.g. the nature, extent, risks, duration and taxation need to be taken into account. A local expert should usually be included in the case-by-case discretion.
What does a permanent establishment mean?
According to the Finnish Income Tax Act a permanent establishment means a distinct place for conducting business of a permanent nature, or a place where special arrangements have been made. According to tax treaties a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on – however, permanent establishment doesn’t mean a place or activities that are in the tax treaty explicitly excluded from the scope (e.g. preparatory or auxiliary actions).
In addition, an enterprise might have a permanent establishment in the case of so-called dependent agent situation, even though it has no fixed place of business in that country. This so-called agent-PE-risk is constituted e.g. when a dependent agent in the other country concludes essential contracts on behalf of the enterprise.
It should be emphasized that also different kinds of project deliveries abroad constitute susceptibly a permanent establishment for the enterprise in that other country.
Even though the wording of the Income Tax Act and tax treaties deviate to some extent, these rules have mainly been interpreted the same way in the Finnish tax praxis.
We are here to help you
It is advisable to find out early the obligations that are caused when business is carried abroad. In principle, if business is carried on in another country without establishing a subsidiary, the risk of having a permanent establishment there is substantial. E.g. in project deliveries a foreign subcontractor might have a permanent establishment although the main contractor was locally tax registered. The possible obligations should be looked into in advance. At least there should be awareness of the consequences of having a permanent establishment e.g. because of falling behind the project schedule.
When it comes to questions related to sales activities abroad, help of a tax expert is usually needed. We have many years of experience of international tax questions and tax planning related to cross-border turnkey projects, construction and installation activities abroad and digital business activities (including so-called server-PE-questions). In addition, because of our Nexia International network we have excellent contacts worldwide.