Permanent establishment
The risk that a workations or business traveller constitutes (or works for the benefit of) a Permanent Establishment in the destination country.
A permanent establishment (PE) is a fixed business facility serving the corporate purpose. It is legally a dependent branch of a company which operates under the same name. The establishment of a PE leads to tax implications. In particular, local tax authorities obtain the right to tax the profits of this branch. Therefore, companies should try to avoid establishing a permanent establishment abroad. The existence of a permanent establishment is determined on the basis of certain criteria set by local authorities, which vary from country to country. As the name suggests, PEs require a certain level of permanency. However, there are no "permanent" temporary workers from abroad. A workation is temporary by character and will generally not be permanent enough. The OECD and the UN support this, the two organizations whose tax treaty models and commentaries have been most widely adopted. Both state that a so-called 'fixed place of business PE' and 'service PE' will usually not be constituted if the presence in the other country is below 183 days. This is one of the reasons why an international stay that exceeds this threshold no longer qualifies as "temporary." As a result, even in countries that have adopted even tighter policies around 'fixed place of business' or 'service PE' than the OECD and UN policies, employees enjoying workations will hardly ever constitute a PE. Nevertheless, there is the danger of constituting a so-called 'dependent agent PE’. In short, the OECD and UN consider a 'dependent agent' an employee that habitually plays the principal role leading to the conclusion of contracts. It is broadly accepted that "habitually" implies a specific frequency. For example, five contracts where the individual played the leading role. Still, this doesn't exclude the theoretical possibility that a dependent agent constitutes a PE during a workation of one day.
Consequences
· Offset profit and submit tax returns abroad
· Corporate tax at 20% to 35%
· Administrative obligations exceeding €100.000
· Consultation of local lawyers/tax advisors
· Penalties and interest
· Brand damage
Handling of risk
To assess and mitigate risks the following information is needed
· Reason of stay
· Duration of trip
· Previous trips in that country
· Activities performed
· Tax payment
In order to assess PE potential risks a workation can entail some information is required such as the reason of the stay, the duration of the trip and the previous trips in the country. The reason behind is that depending on the nature of the trip and the activities to be performed from the destination country, the risk can highly increase (i.e., negotiating contracts wouldn't involve the same risk that conducting auxiliary activities). The duration of the stay is also key as exceeding certain time limits could lead authorities to conceive a PE has been created in the country, same way works for the previous trips in the country as accumulated duration may be taken into account when assessing the total length of the stay (and consequently the duration of the PE if it has been triggered). PE would imply paying corporate taxes in the destination country and would also involve huge administrative costs including fines and local lawyers/tax advisors if the PE is created.
WorkFlex solution Because of the above named consequences, employers want to prevent their employees who temporarily work from abroad from constituting PE´s. Given that a PE implies a certain permanency - it is the name after all - managing the PE risks of temporary work from abroad should be possible. The WorkFlex compliance logic helps employers with this, not only by flagging potentially risky employee requests but also by providing mitigating measures such as employee instructions. This risk dimension is included under the no-risk concept.
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