Permanent Establishment Risk Factors For a Remote Workforce

Introduction

Since the COVID-19 pandemic, working remotely has become even more popular. Many employees have realized a better work/life balance working from home and now consider the flexibility of remote work one of their top priorities when seeking employment.

This created an opportunity for companies of all sizes to expand globally and hire qualified and motivated individuals from around the world to fill their remote positions.

As beneficial as international recruitment can be for your globally expanding company, it also bears risks involving non-compliance with complex and ever-changing local laws. One such risk is that the government of any of the countries you are hiring decides your business is a permanent establishment (PE).

What Is Permanent Establishment Risk?

Permanent establishment status means that a government considers your business activity in a country substantial or ongoing for a long enough duration. Your business should be taxed similarly to any other country’s established businesses.

The problem is that your revenue is already going to be taxed in the country of your incorporation. If it is taxed elsewhere, that is double taxation. Some countries have tax treaties and trade agreements to minimize double taxation.

A permanent establishment may be unavoidable. Types of the permanent establishment include:

• Local branch
• Factory
• Management office
• Workshop
• Natural resources mine

Why Is Permanent Establishment Risk Higher for Teams With Remote Workers?

Before the pandemic, when many companies had fewer international remote workers, a company’s risk of being considered a permanent establishment in another country was not as high. Companies have no risk of being considered a permanent establishment in another country if all of their workers come into the office and the staff is not comprised of remote workers from other countries.

Since the pandemic, global remote employment has enabled employers to hire globally dispersed staff remotely. The local tax authorities in those countries look into whether the revenue generated by the companies should be considered taxable corporate income. A company may be regarded as a permanent establishment even if fully remote.

What Are the Consequences of Creating a Permanent Establishment?

One of the main consequences of permanent establishment status is double taxation on your company’s income. Suppose your company has been deemed a permanent establishment in a country. In that case, the government can tax the company’s revenue in that country and the country where you are incorporated.

It can become even more complicated because international corporate tax rates differ. Your company can be taxed at various rates if you do business in numerous countries worldwide.

Permanent Establishment Risk Factors

If you are doing a significant amount of business in another country, then that country can tax your company at its corporate tax rate, separate from the tax rate of your own country.

Risk factors include:

• Local employees doing significant revenue-generating activities such as sales
• Establishing a local entity
• Having in-country meetings
• The local staff working at the company for a long duration
• Having regular rather than intermittent local business activities

Key Considerations That Determine Permanent Establishment Risk With Remote Workers

Every country has laws and regulations, and there is no one way to mitigate permanent establishment risk ultimately. It’s essential to work with local legal experts in any country you’re hiring to minimize all employment risks, including permanent establishment.

PEO Versus EOR

An employer of record (EOR) is a more expanded form of human resources outsourcing. With an EOR, you do not need to establish an entity in the country you are hiring because the EOR already has an owned entity or can partner with a third-party entity.

Unlike employers of record, which become the legal employer of your hires, professional employment organizations (PEOs) co-employ your employees and your company. This type of human resources outsourcing is only possible if your company has a subsidiary in the country.

An EOR hires employees globally on your behalf and becomes the legal employer of your employees wherever they are based. Your company remains in charge of your operations, but the EOR functions as your human resources department, the employer of your remote staff on paper.

Why an EOR Is a Better Option Than Building Your Entities

An EOR is like a one-stop shop for remote international employment. Employers of record can hire and onboard new team members, manage payroll, provide benefits, and take care of compliance. With this type of organization, the risks and liabilities of international employment are much lower, as the EOR takes full responsibility for employing your remote staff in a country and ensures compliance.

One of the main reasons for choosing an EOR for compliance is that the EOR has a legal presence in the country already and works with local legal experts to ensure compliance with employment laws, tax laws, and legal issues such as minimizing the risk of employee misclassification and the risk of permanent establishment status.

Should You Consider a PEO vs. EOR to Manage Permanent Establishment Risk?

In addition to the co-employment arrangement, the PEO still requires your company to have a local legal entity in the country. A physical presence in the country increases the risk of being considered a permanent establishment.

When you establish a legal subsidiary in a country, you register the business with government authorities, apply for and receive tax identification so you can pay payroll taxes, and open a bank account with minimum deposits, depending on the local incorporation laws. All of these activities can trigger a permanent establishment risk.

Partnering with an EOR dispenses with the need to establish a local entity, making it the less risky option.

How an Employer of Record Helps You Minimize Permanent Establishment Risk

While it doesn’t remove the chances that your company is considered a permanent establishment, partnering with an employer of record can reduce the risk. You wouldn’t have a fixed place of business in the country because the EOR owns an entity. The EOR also files and reports taxes on your behalf, thus reducing the risk of PE status.

Contractor to Permanent Employee Conversion

It may seem like working with contractors will be preferable to hiring employees, but even working with independent contractors can trigger a permanent establishment risk.

The risk of misclassification, which is classifying your workers as if they are contractors who are not entitled to benefits, is an unnecessary risk if an employment relationship benefits both parties. If the contractor wants more benefits and cheaper for the employer, then the employer can convert the contractor into an employee. An employer of record, such as Skuad, can help make the conversion happen, reducing risk for your company.

How Skuad Can Help You Manage Permanent Establishment Risk

Skuad is an employer of record with legal experts in each country you want to hire. Those legal experts know the local laws and customs, can help your company remain compliant with all regulations, including employment and tax laws, and can take the necessary steps to help you avoid permanent establishment status.

Hiring employees through an EOR and having the EOR report and pay taxes on your behalf is a way to reduce and manage permanent establishment risk.

Permanent Establishment Checklist

The answers to the following questions may help you determine if your company is at risk of permanent establishment status or is on the right track to help minimize that risk as best as possible.

Checklist:

1. Has your company had employees for over one or two years? A longer duration of business activity in a country may qualify as a permanent establishment.
2. When you have meetings, are they in your country or abroad? Meetings in your home country are less risky.
3. Do you send agents to generate revenue in a foreign country? This is a risk you may have to take.
4. Do you have an entity, a fixed place of business, established in the country, or will you partner with an EOR to reduce the risks?
5. Is your company regularly reviewing risk factors and seeking local tax advice from local legal experts?

Partner With Skuad for Employer of Record Services

Not only can partnering with an employer of record like Skuad help minimize the risk of misclassification or other compliance issues, but it can also help your company in other ways:

• Hire remote workers without an entity
• Hire, onboard, and pay international employees and contractors in 160+ countries
• Pay your workers in 100+ currencies
• Manage benefits and accurately calculate payroll and payroll taxes
• Reduce risks by ensuring full compliance

Get a demo today to see how we can offer your company international employer of record services to help you hire international employees and contractors.