As businesses seek to drive growth, they can see their activities expand beyond the UK and into the worldwide marketplace. Whilst this can lead to great opportunities, it can also lead to significant risks, in particular where there is a failure to comply with local tax requirements. If your business carries out activities in an overseas country resulting in income being generated, then that presence may create a Permanent Establishment in that jurisdiction.
This can include opening a fixed place of business such as an office or manufacturing base but can also be simply appointing a sales agent that can negotiate and sign contracts. In some jurisdictions it can also include circumstances where individuals are sent overseas to provide a service for a period of time. It is therefore important to consider Permanent Establishment risk whenever overseas activities are undertaken.
If a Permanent Establishment is created
- A proportion of the businesses income that is attributable to the Permanent Establishment will likely be subject to local taxes and filing requirements in that country, and local sales taxes may be due.
- Failure to comply with local compliance requirements can lead to significant penalties, even where the underlying tax is minimal. For example, the US tax system has severe penalties for failing to file all tax returns required, which can lead to penalties of $30,000 in some cases.
Each country has their own tests to establish whether a Permanent Establishment has been created, there is not one set rule and the tests can vary considerably.
In such cases, getting the right advice in the right place is essential, which is why in 2018 Shorts joined the Praxity Global Alliance. Praxity is the world’s largest alliance of independent accounting and consulting firms, which means that Shorts work closely with professional advisors in over 100 countries to meet all our clients’ needs.
If you are concerned that your business could be caught by the Permanent Establishment rules, or you are considering doing business overseas for the first time, then our business taxes team would be happy to help. Drop us a line and a member of the team will get back to you.
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David Robinson
As a Tax Partner, I advise clients on all aspects of UK tax, ranging from business taxes, transactions and private client matters, helping to achieve the objectives and aspirations of businesses and their owners.
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