What is a permanent establishment?
Permanent Establishments are a feature of the international tax system. They allow a country to charge tax on revenues 💰 that have been generated there, even if that revenue comes from a multinational company that’s incorporated elsewhere.
You’ll still need to pay UK corporation tax, but there’s (usually) a tax treaty between the UK and the other country. The tax treaty (usually) ensures that one of the two countries refunds, or partly refunds, the tax you’ve paid in the other country.
However, you’ll have to deal with a lot of additional paperwork (and accounting fees). What’s more, if the tax due in the other country is higher than that in the UK you’ll usually pay the higher amount overall. Whereas, if the other country charges you less tax, you’ll not see that benefit – the total tax you’ll pay in that situation is usually the UK amount.
Why’s this a problem for tech start-ups and scale-ups?
Well, international tax law is complex and slow moving, whereas the tech industry in particular is very dynamic. Which is an accident waiting to happen 🚑.
The problem is that even very new tech start-ups can quickly be generating international revenue. No problem there …
… except that the tech industry is also a trailblazer at flexible and remote working. And increasingly this means looking for global solutions at finding the talent you need.
It’s this confluence that can find you getting unexpectedly caught up in the Permanent Establishment rules.
[meanwhile, those originally meant to be targeted 🏹 spend a fraction of their swag 💰 on clever tax structuring].
So, what can be done about it?
If you’re aware of the problem there are plenty of things you can do to ensure you aren’t caught up in this unfairly. On the other hand, if creating a Permanent Establishment is what your business needs, it’s important to be on the front foot in managing the situation and making sure you’re using all the available tax reliefts. As with most things tax related, those steps can’t be applied retrospectively, so it’s important you’re getting the advice and support you need on an ongoing basis.
I help tech entrepreneurs build more profitable and strategic businesses so they can scale smarter | Virtual CFO and Founder of Oxwich Accountancy