Permanent establishment (PE)
According to Swiss tax law, in line with the OECD Model Tax Convention on Income and Capital, a permanent establishment (PE) represents a fixed place of business in which a qualitative and quantitative important part of the commercial and technical activity of the company is carried on.
A PE is recognized according to Swiss tax law if the following cumulative conditions are met:
- Existence of a fixed place of business in Switzerland: according to this notion, the company must have at its disposal fixed facilities in which it may carry out its activities. The fact that the company owns the facilities is not relevant, but it must be able to dispose of them economically (lease, rental agreement). Branches, factories, sales agencies, permanent representations, etc. that are maintained for at least 12 months are considered as PE.
- A qualitatively or quantitatively important part of the company activity: an activity is considered as “qualitatively important” when it might be considered as a “company inherent activity” and not as an assistance activity, as, for example, a pure administrative activity (like invoicing). The notion of “quantitatively important” shall be appreciated according to the circumstances. It means that minor or not important activities cannot be considered as “quantitatively important”.
- Belonging to the company: the PE must appear to a third party as a part of the company and should be economically dependent on it. This definition is generally in line with the criteria of the OECD Model Tax Convention on Income and Capital which enacts that the term “permanent establishment” does not apply to an agent, unless the agent has, and habitually exercises an authority to negotiate and conclude contracts in the name of the enterprise
Instead of establishing a subsidiary in Switzerland, a foreign company can also establish a branch office, a common form of entity in Switzerland for a foreign company.
Such branches have a certain organizational and financial independence from the foreign parent company. From a legal point of view, the branch office is part of the foreign company, although it can contract and transactions in its own name, and it is not obliged to in its own name and can act as plaintiff and defendant in the jurisdiction where it is located.
A branch office must be registered in the commercial register. In terms of authorization, registration, taxation, and accounting, the branch office is treated as a Swiss company. In order to establish a branch in Switzerland, it is necessary to appoint an authorized representative domiciled in Switzerland.