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Accelerate your business with these expert tips on "Permanent Establishment". Analyse and discover this TIP!
It is about a fixed place of business located in the country. Through which a foreign company or a natural company without residence carries out all or part of its activity. It shall also be understood as a permanent establishment in the country. Where a person, other than an independent agent, acts on behalf of a foreign enterprise and possesses or exercises powers enabling him to conclude acts or contracts which are binding on the enterprise.
It is essential to determine a company's tax liability and the tax regime to which it will be subject.
Requirements for permanent establishment
- Existence of a place of business. It must be a physical location that is used for the development of business activity (premises, office, warehouse, etc...).
- It must be a fixed place of business. The degree of fixity is determined by the length of time the business has been in the permanent establishment, with a minimum of 180 days for it to be considered as such.
- This is where the company's business must be conducted. In other words, it must be used for the actual conduct of the business.
A permanent establishment is a figure used in the tax field to determine the presence of a company in a country other than that of its tax domicile. This is a branch or centre of operations abroad which, although it has no legal personality of its own, is considered to carry on a business activity in the country in which it is located.
The presence of a permanent establishment can have significant tax implications, as the country in which it is located may impose taxes on the income generated by that establishment. For this reason, it is important for companies operating across borders to understand the requirements and consequences of establishing a permanent establishment in a foreign country.
The characteristics of a permanent establishment include:
- The existence of a fixed place of business, such as an office, a shop or a factory, where the company carries out its activity.
- The company must carry out a business activity there on a regular or periodic basis.
- The company must have the personnel or material means to carry out the activity in the foreign country.
Determining the existence of a permanent establishment is a complex process that can vary depending on the tax laws of each country. For this reason, it is important for companies operating in several countries to work with tax and legal advisors to ensure compliance with tax obligations and avoid potential penalties.
Permanent establishment to set up a new company
A permanent establishment is a concept used in tax law and refers to a continuous physical presence of a company in a country other than that of its tax residence.
If a company wishes to establish a business in a foreign country, it should consider whether its activity can be considered a permanent establishment in that country. If it is found to be, the company will have to comply with the relevant tax obligations in that country.
The creation of a new company in a foreign country may give rise to the existence of a permanent establishment if the company carries out business activities in that country with a certain continuity. For example, if the company has an office or business premises in the country, or if the company's employees work in the country for an extended period of time.
It is important to consider the tax implications of having a permanent establishment in a foreign country, as it can have a significant impact on the company's tax burden. It is therefore recommended to seek legal and tax advice before setting up a business in a foreign country.
Advantages and disadvantages of having a permanent establishment
The advantages and disadvantages of having a permanent establishment for a new company are:
ADVANTAGES:
- Physical presence: Having a permanent location provides a stronger and more professional image of the company, which can be important in attracting potential customers and partners.
- Greater control: by having your own space, you have more control over the organisation, the working environment and the use of resources.
- Stability: Having a permanent establishment provides a sense of stability and security for both owners and employees.
- Increased storage capacity: Having your own space allows you to have more storage space, which can be important for companies that handle large volumes of inventory.
DISADVANTAGES:
- High costs: permanent establishment can be costly both in terms of rent or purchase and in terms of maintenance costs, utilities and other associated expenses.
- Geographical limitations: having a permanent establishment may limit the company's ability to operate in other geographic areas.
- Less flexibility: Having your own space means you have less flexibility to adapt to changes in the market, in customer demand and in your company's needs.
- Increased accountability: owners of a permanent establishment are responsible for maintaining the space, complying with applicable regulations and standards, and ensuring that the business is operating in a safe and legal manner.
It is important to consider these advantages and disadvantages when deciding whether or not to have a permanent establishment for a new business, and if so, to select the location and type of space appropriate to the needs of the business.
When is a permanent establishment considered to exist?
A permanent establishment of a company in a country is considered to exist if either of these two conditions is met:
- Whether there is a head office, branch, office, factory, workshop, warehouse, sales outlet or other similar location in that country.
- Whether a person acting on behalf of the company has, and habitually exercises, in that country, powers to conclude contracts on behalf of the company.
Practical examples of permanent establishments
Some practical examples of permanent establishments are:
- A branch of a foreign company in another country: if a company opens an office or premises in another country to carry out its economic activity, it is considered to have a permanent establishment.
- A representative office: if a company has a representative office in another country to carry out activities such as sales promotion, market research or conducting business negotiations, it will also be considered to have a permanent establishment.
- A workshop or factory: if a company builds a factory or workshop in another country to produce goods or provide services, it is considered to have a permanent establishment.
- A warehouse or depot: if a company has a warehouse or depot in another country to store and distribute its products, it is considered to have a permanent establishment.
It is important to note that each country has its own rules and criteria for determining when a company is considered to have a permanent establishment in its territory.
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TASK
CASE STUDY OF AN ENTREPRENEUR EXPLORING THE POSSIBILITY OF SETTING UP A PERMANENT ESTABLISHMENT
Juan is an entrepreneur who is thinking of expanding his business selling electronic products online and creating a physical presence in the city. He is considering setting up a permanent establishment.
First, Juan investigates the costs associated with setting up a permanent establishment, such as renting or purchasing business premises, the costs of refurbishing and decorating, the costs of utilities, and the costs associated with hiring employees. It also investigates the regulations and legal requirements for setting up a physical business in your city and the tax and accounting obligations associated with maintaining a permanent establishment.
After making a careful assessment of costs and regulations, Juan decides that establishing a permanent establishment is the best option for his business. He realises that a permanent establishment will allow him to reach a wider customer base and provide better customer service. In addition, the permanent establishment can improve the perception of his brand and provide a platform for future growth.
Juan starts looking for suitable commercial premises and hires a team of contractors to carry out the necessary renovations to the space. He also starts working with a lawyer and an accountant to make sure he is complying with all regulations and tax requirements.
Finally, after months of hard work, Juan opens his permanent establishment and celebrates the opening with a host of new and loyal customers. As his business continues to grow, Juan is grateful that he made the decision to establish a permanent shop and is excited about the possibilities that lie ahead.
What conditions must a virtual office fulfil in order to be considered a permanent establishment?
A permanent establishment refers to a physical presence in a country other than a company's home country, which may have tax and legal implications. In the case of a virtual office, it will be considered a permanent establishment if it meets certain conditions:
- Physical presence: the company has a physical presence in the country where the virtual office is located, even if it is minimal. For example, having a physical address in the country.
- Permanence: physical presence must be continuous and stable for a specified period of time, usually more than six months.
- Business activity: the company must carry out a significant business activity through the virtual office, such as the sale of products or services.
It is important to note that tax laws and regulations vary from country to country, so a tax advisor or a specialised lawyer should be consulted before making any decisions. Many grants require the beneficiary to have a permanent establishment in the region.
It is true that some grants may require the beneficiary to have a permanent establishment in the region where the aid is granted. This is because some administrations seek to promote job creation and economic development in their territory, and consider that having a physical presence in the region may contribute to this.
In any case, it is important for entrepreneurs to carefully review the requirements of the grants they wish to apply for and ensure that they meet all the criteria before applying. In some cases, it may be possible to demonstrate that the required conditions are met despite not having a physical permanent establishment in the region, for example, by hiring local workers or suppliers or by carrying out economic activities in the area.
In short, it is essential to be properly informed about the requirements and conditions of the subsidies in order to be able to apply for them effectively and in compliance with all the requirements.
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