In the world of international business, multinational enterprises (MNEs) face unique challenges in managing their Permanent Establishment (PE) risks. The important types of PE risks for MNEs are Home Office PE risks and Dependent Agent PE risks. These risks vary across different jurisdictions where MNEs have employees, with risk levels ranging from low to high.

This article is written by Hendrik Bastiaans ([email protected]) and Dick Brinkhof ([email protected]). Hendrik and Dick are both part of RSM Netherlands International Tax Services Practice.

Permanent establishment, Home office PE, and Dependent Agent 

A PE is a term used in international tax law. It refers to a location or a place where a business, typically a multinational company, has a significant presence in a foreign country. This could be an office, a factory, a branch, or even a home office in some cases. The concept of PE is important because it helps determine which country has the right to tax the company’s profits. If a company has a PE in a country, that country can tax the profits that are generated by the activities of the PE. 

  • A Home Office PE refers to a situation where an employee’s home office is considered to be a fixed place of business of the employer. This can occur when the home office is at the disposal of the employer and is used on a continuous basis for carrying out the business of the employer.
  • A Dependent Agent PE occurs when a person, who is not an independent agent, 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.

Application in the Netherlands regarding Home Office PEs and Depend Agent PEs

To determine if there is a PE in the Netherlands the guidelines set by the OECD in 2017 without any reservations are followed. These guidelines have updated the rules for when a home office can be considered a PE. Now, if an employer asks an employee to work from home, either directly or indirectly, that home office can be recognized as a PE in the Netherlands. This is a change from the previous rules.  However, for tax treaties that still follow the older OECD guidelines from 2014 or earlier, the rules are a bit different. In these cases, the employer must have full legal control or possession of the home office for it to be considered a PE. There is a Dutch ruling from 1957, known as the “Werkkamerarrest”, which is still used as a reference for these older treaties.

In the case of a dependent agent. If a company from another jurisdiction carries out its activities in the Netherlands through another company or person, under certain circumstances, that other company or person from that other jurisdiction can be considered a Dependent Agent of the company in the Netherlands. This allows the Netherlands to tax the profits attributable to this Dependent Agent PE. The Netherlands has also not made any reservations in the explanatory notes to the 2017 OECD commentary regarding dependent agent PEs. In the 2017 OECD commentary, that also employees who “habitually play the principal role leading to the conclusion of contracts” can be dependent agents. This broadens the definition of a Dependent Agent PE. What makes the 2017 OECD commentary significant in interpreting more recent treaties (concluded after 2017).  Additionally, it is crucial to monitor more closely whether bonuses linked to sales results of employees working in the Netherlands could trigger recognition of a dependent agent PE. 

Applying the Dutch Objection Exemption

In the event a PE from a Dutch resident taxpayer is detected in a local jurisdiction (outside the Netherlands), it becomes necessary for the Dutch corporate taxpayer to apply for an object exemption in the Dutch CIT Return. This exemption plays an important role in ensuring that the company is not subjected to double taxation.

The amount of profit that will be allocated to the local PE and allowed to be exempted needs to be calculated according to the rules in the Dutch PE decree 2022. This calculation is based on the functions and risks performed by the employee in the local jurisdiction. An amount of profit will then be allocated to the PE, ensuring a fair and equitable distribution of taxable income.

Understanding PE-Risks across jurisdictions

For MNEs, it is crucial to understand the specific facts and circumstances of the employees working in each local country to determine if there are any PE risks present. This requires the opinion or verification of a local council. In case a foreign PE is identified, a local Corporate Income Tax (CIT) return needs to be filed. 

Please note that while there appears to be a global consensus on the definition of a permanent establishment (PE), this can vary in practice. Some countries, like Poland for example, have strict interpretations and quickly consider the presence of home office PE. Conversely, other countries, like Germany, may have a more lenient interpretation and do not readily classify a situation as a home office PE. Therefore, it is essential to investigate on a country-by-country basis whether a PE exists in that country and whether the home country provides relief from double taxation.

Forward Thinking

Navigating the complexities of PE risks requires a strategic and informed approach. By understanding the specific PE risks in each jurisdiction and applying the Dutch objection exemption, MNEs can effectively manage their tax obligations and mitigate potential risks. As the business landscape continues to evolve, staying ahead of these challenges will be key to the ongoing success of these enterprises. 

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