When sending employees abroad it should always be considered whether this could constitute a permanent establishment. A permanent establishment is defined in general as follows: “a fixed place of business, through which the business of an enterprise is wholly or partly carried out”. Whether or not a permanent establishment is constituted highly depends on the specific facts and circumstances.
Normally one of the following two scenarios applies:
- An employee is sent abroad and is still employed by the Swiss company. The costs are not recharged to the foreign entity. The employee still reports to his/her Swiss employer.
- An employee is sent abroad and the foreign company becomes his/her employer or the costs are recharged to the foreign entity. The employee reports to the foreign entity.
The latter should generally not constitute a permanent establishment if the host country follows the OECD Model Tax Convention on Income and on Capital approach. With regard to the recharge of costs it needs to be ensured that such recharge meets the arm’s length principle.
In case the employee remains employed by the Swiss company, the costs are not recharged to the foreign entity and the employee keeps reporting to the Swiss employer it should be analyzed whether the activities abroad constitute a permanent establishment.
Fixed place of business
As per the definition stated above there needs to be a “place of business” which needs to be “fixed” and through which “the business of an enterprise is wholly or partially carried out”.
The requirement of a place of business can also be fulfilled if employees of the Swiss entity work on client premises or in the offices of a group entity. In this regard it is important whether the premises are at the disposal of the Swiss entity.
The term fixed requires a specific place and a certain degree of permanence. Only with regard to building sites or construction or installation projects it is generally defined in double tax treaties that they only constitute a permanent establishment if they last more than a specific number of months. From a Swiss perspective based on current rulings by the Federal Supreme Court it can be assumed that a permanent establishment is constituted in Switzerland if the conducting of business in Switzerland lasts for more than twelve months; however, the commentary to the OECD Model Tax Convention on Income and on Capital states that six months should be sufficient.
In case the entity has no fixed place of business in the host country, it still can be treated as having a permanent establishment abroad. This can be the case if there is a person acting for the entity. Such person generally needs to be a dependent agent. It is further required that the person has the authority to conclude contracts and therefore bind the Swiss entity. In addition, the person needs to make use of this authority regularly. However, it should also be considered that a permanent establishment generally cannot be avoided by signing the contract in Switzerland. I.e. if the person has the authority to negotiate the details with the potential client and the contract is only signed or automatically approved in Switzerland, there remains a medium to high risk that this constitutes a permanent establishment abroad.
Tax consequences of a permanent establishment
In case a permanent establishment is constituted, the Swiss entity will become liable to income tax in the host country. In the worst case this could lead to double taxation. This could be the case if there is no double tax treaty with the country the Swiss entity is active in and Switzerland and the other country have different views on whether the Swiss entity is having a permanent establishment abroad or not. Another example of a double taxation could be if the Swiss entity is already finally assessed for the year the foreign country is claiming a right to tax the Swiss entity due to a permanent establishment.
As shown above, income tax consequences need to be carefully analyzed in case a Swiss entity sends employees abroad, in order to avoid double taxation. Action 7 of the BEPS action plan – prevent the artificial avoidance of PE status – will even increase the need of a careful analysis.