In the March 2014 newsletter, we presented a high-level overview of both worldwide and territorial corporate tax systems. In this article, we consider how the physical presence of employees in a host country can cause the employer and the employees to be taxable in the host country, even in the case of short-term mobility assignments.

The "Risky Business" of Global Mobility

The business of global mobility isn’t risk-free. Many areas of potential risk are involved when employees travel outside their home country on business, whether for a short-term assignment or a long-term rotation. There are risks involving the individual (including employment laws, immigration laws, budgets and business plans, and employee / family satisfaction.) In addition, employer-related corporate tax risks arise in a global mobility context. This is because the actions of an individual employee, or groups of employees, impact not only their own individual tax risks, but also the employer’s tax position in the host country. Of course, many global companies have established extensive business operations abroad and legitimately have income tax liabilities in those countries. We’re concerned here about situations in which an unintended taxable presence is created in the host country.

Permanent Establishment Risk

There are a number of different ways that an employer’s tax position can be unexpectedly affected in a global mobility context, the most impactful of which is "Permanent Establishment" risk. A Permanent Establishment, or PE for short, isn’t necessarily what it sounds like. A PE is a tax concept that may be defined in a country’s domestic tax laws, or under a bilateral Income Tax Treaty between the home country and the host country. The Organization for Economic Cooperation and Development (OECD), in its Model Income Tax Treaty, defines a PE as a "fixed place of business." The OECD commentary indicates that a fixed place of business has three components:

  • Fixed refers to a link between the place of business and a specific geographic point, as well as a degree of permanence with respect to the taxpayer. An "office hotel" may constitute a fixed place for a business for an enterprise that regularly uses different offices within the space.
  • A place of business. This refers to some facilities used by an enterprise for carrying out its business. The premises must be at the disposal of the enterprise. (The mere presence of the enterprise at that place does not necessarily mean that it is a place of business of the enterprise.) The facilities need not be the exclusive location, and they need not be used exclusively by that enterprise or for that business. However, the facilities must be those of the taxpayer, not another unrelated person.
  • Business of the enterprise must be carried on wholly or partly at the fixed place.

While this is the OECD Model Treaty definition, a broad range of variations exists in the more than 3,000 bilateral income tax treaties. In addition, where a bilateral treaty isn’t in place between the home and host countries, local (domestic) law provisions in the host country will define when a company is considered to be doing business in the host country (although in some countries, OECD treaty principles are incorporated into domestic law.) These domestic laws frequently are more onerous than a Treaty definition of a PE might be, under equivalent economic circumstances. US domestic law, for example, is more onerous than the typical tax treaty PE concept. This can more readily create US corporate income tax exposure if a foreign employer based in a non-treaty country sends employees to the US.

In the context of global mobility, this means that even the short-term activities of an employee, or a group of employees, can have the effect of creating a Permanent Establishment in the host country. Once that happens, the income generated by the employer that is connected with the activities of the employee(s) is subject to corporate income tax in the host country. Indeed, in some locations a "force of attraction" principle may exist, depending on treaties and national regulations, which can cause all of a company’s income from that host country to be taxed as belonging to that PE, even if the PE relates only to a small segment of the company’s host country activities.

Examples - Permanent Establishment and Tax Treaties

Let’s begin with the short-term travel context. In these situations, employment of the individual typically remains with the home country and has not been shifted to the payroll of a host country subsidiary. Here, it’s crucial, whenever there is a bilateral tax treaty in place, to check the terms of the PE article in that treaty, because this article may permit occasional and irregular business activities to take place in the host country without creating a PE.

Example 1: Occasional and Infrequent Basis

Judith, a sales executive with Global Exports, travels to Germany on business from time to time. Occasionally, Judith will negotiate and sign a supply agreement with a German customer of Global Exports. Assuming that Judith isn’t performing services or other business activities in Germany, has Judith created a PE for Global Exports in Germany?

Article 5 of the US-Germany income tax treaty ( permits Judith to do what she has done without creating a PE. The article states, in relevant part:

"[W]here a person... is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise..."

Notice the underlined language. Judith, an employee of Global Exports, has to have the authority to conclude contracts in the name of Global Exports, AND must exercise this authority "habitually", before her sales activities will create a PE. What does "habitually" mean? Usually this term is interpreted to mean "on a regular and continuous basis." The fact, therefore, that Judith might conclude a sales contract with a German customer on an occasional and infrequent basis should not create a PE in Germany for Global Exports.

Since every treaty is different, it’s critical to consult the specific treaty language. Circumstances that might not create a PE under one treaty could create a PE under a different treaty.

Example 2: Short-Term Treaty Exception

Richard and Kamal are computer technicians. Their employer, Global Exports, has contracted with a German client to install computer hardware at the client’s headquarters in Bremen. Richard and Kamal travel to Bremen together and spend two months installing, and one month testing, the hardware at the client’s site. Have they created a PE for Global Exports? Fortunately, paragraph 3 of Article 5 of the treaty states:

"A building site or a construction, assembly or installation project constitutes a permanent establishment only if it lasts more than twelve months."

Assuming Global Exports doesn’t send anyone else to Germany for this installation project, and since Richard and Kamal are there for only three months combined, Global Exports hasn’t created a PE in Germany with respect to that installation project.

Example 3: An Unintended PE

The facts are the same as above, except that Richard works in Bremen for nine months, after which he departs for the US and Kamal returns to Bremen for another four months. In this case the short-term treaty exception does not apply and Global Exports has established a PE in Germany. As a result, the profit it realizes on this project from the work performed by Richard and Kamal is taxable in Germany. Because Richard was in Germany for more than 183 days, his earnings are subject to German income tax. Without the establishment of the PE, Kamal may have been able to avoid paying German income tax on his income as he was in Germany for less than 183 days. However, because a PE is established, Kamal, as well as Richard and Global Exports, must file income tax returns in Germany and pay tax on their German income.

Other Host Country Consequences of Creating an Unintended PE

In addition to host country income tax filing and payment obligations for the employer and the employee, an unintended PE situation can entail Value Added Tax registration and filing obligations; social insurance taxes on the employer and the employee; exposure to labor and employment laws; immigration law issues; and employer tax withholding and reporting requirements. These obligations, if not planned for, can be expensive and time-consuming, and failure to attend to them can lead to penalties and travel restrictions that can discourage business prospects.

Brass Tacks

For a variety of reasons, it’s clear that an unintended PE isn’t good news for the company or the employee. In order to best avoid that exposure in a global mobility context, the global mobility group should review the anticipated activities of an employee, before travel begins, with a capable international tax advisor, and take the necessary precautions. As Benjamin Franklin said, "an ounce of prevention is worth a pound of cure." Without a doubt, pre-departure planning, careful monitoring of project completion timelines, and open lines of communication between the employer and the employee on travel dates and assignment-related expectations can result in considerable savings of time and resources for all parties involved.

If you have any questions regarding international corporate taxation, please contact us at

The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice.

Author: Fuad S. Saba & Brian Schwam, WTP Advisors