How to avoid creating Permanent Establishment in Europe?

[Don]

You should be more clear. Do you have a job at McDonalds? you don't wrote anything about you income so you expect us to know what your income is.

So I will make it easy for you:

low income = stay home, mind your job at McD
high income = speak with professionals and mindwise people like you do here and contact some of them

+1
What exactly are you doing and what is the size/industry of the company you are working for?

Before you set up a structure somewhere, please note that independent contractor misclassification presents serious risks for companies, so it might not be suitable for everyone. Treating individuals as independent contractors while they perform the function of a full-time employee is an illegal business practice that many governments are beginning to recognize and penalize companies that make this misstep.

 

[FixieHartmann]

+1
What exactly are you doing and what is the size/industry of the company you are working for?

Before you set up a structure somewhere, please note that independent contractor misclassification presents serious risks for companies, so it might not be suitable for everyone. Treating individuals as independent contractors while they perform the function of a full-time employee is an illegal business practice that many governments are beginning to recognize and penalize companies that make this misstep.

I would be technical co-founder, industry is B2B saas and size of the company is very small, basically just 2-3 founders and no employees (in the beginning at least).

According to my understanding I can work around the misclassification by setting up a local entity that employs me.

However I think for the PE risk I would refer to what Sols said and basically prefer a jurisdiction that isn’t very strict with regards to that.

 

[Larin]

I think most of the advice in this thread hasn't been about the PE risk to your employer, aside the comments from @CyprusLawyer101.

You haven't mentioned the country of incorporation of your employer. This will be important in determining PE risk as there is likely to be a double treaty in place between your employer's jurisdiction and where you may settle. From what I've seen, however, most PE provisions in tax treating follow the same OCSE model treaty working, older ones use the ones from the 70s and newer ones from the 2000s.

You can read the 2017 version here: https://www.oecd.org/ctp/treaties/articles-model-tax-convention-2017.pdf Article 5 is what you want.

Basically, don't do those things to reduce the PE risk and you can live in any country.

I have seen more aggressive, or shall we say digitally unfriendly versions where mere living of major shareholders constitutes PE, but that will again depend on the tax treaty between the two countries.

The only other thing I will add is that PE risk is likely to be hypothetical more than anything. It seems that you are at an early stage startup and it will take a long time before anyone becomes interested in taxing your revenues outside of the jurisdiction you incorporated in.

Also, this is definitely not a tax advice. Get qualified help in the offline world if you want advice.

 

[Radko]

Try Gibraltar, airport right there, no tax on foreign income, cross the border and you are in Spain instantly.

 

[FixieHartmann]

I think most of the advice in this thread hasn't been about the PE risk to your employer, aside the comments from @CyprusLawyer101.

You haven't mentioned the country of incorporation of your employer. This will be important in determining PE risk as there is likely to be a double treaty in place between your employer's jurisdiction and where you may settle. From what I've seen, however, most PE provisions in tax treating follow the same OCSE model treaty working, older ones use the ones from the 70s and newer ones from the 2000s.

You can read the 2017 version here: https://www.oecd.org/ctp/treaties/articles-model-tax-convention-2017.pdf Article 5 is what you want.

Basically, don't do those things to reduce the PE risk and you can live in any country.

I have seen more aggressive, or shall we say digitally unfriendly versions where mere living of major shareholders constitutes PE, but that will again depend on the tax treaty between the two countries.

The only other thing I will add is that PE risk is likely to be hypothetical more than anything. It seems that you are at an early stage startup and it will take a long time before anyone becomes interested in taxing your revenues outside of the jurisdiction you incorporated in.

Also, this is definitely not a tax advice. Get qualified help in the offline world if you want advice.

Thanks a lot, great advice! Yes we are currently talking with lawyers and tax consultants in both countries to make sure that we are fully compliant and that there hopefully won't be any issues in the future.

 

[Nomade]

Well, if I set up a company without substance in Dubai and live in Cyprus then CFC rules will come into place and the company will become tax resident of Cyprus? Cyprus - Corporate - Group taxation

According to my understanding living in country a) but having a company in an offshore tax haven b) only works if you have a good amount of substance in country b).

Can anyone confirm this, especially the bolded?

I keep looking for the catch with Dubai for the location independent owner that has international business, which I guess is most people on here. It can be much less expensive than many think, main cost seems to be the company and visa which I found can be done under $7k depending on the Free Zone.

If someone incorporates a Dubai company, he gets residence, plus with the new law can even get tax residence in just 3 months. To further prove his "real" residence, for under $10k a small apartment can easily be found. Isn't he then free to go on "vacation" in Europe for 6-9 months per year, being careful to avoid local residence and or creating too many ties on paper just in case, effectively meaning for less than $20k he gets an entirely tax free life, and some holiday in Dubai? What would be the catch, the risk of triggering PE while he's "traveling"?

You can read the 2017 version here: https://www.oecd.org/ctp/treaties/articles-model-tax-convention-2017.pdf Article 5 is what you want.

Basically, don't do those things to reduce the PE risk and you can live in any country.

I have seen more aggressive, or shall we say digitally unfriendly versions where mere living of major shareholders constitutes PE, but that will again depend on the tax treaty between the two countries.

The only other thing I will add is that PE risk is likely to be hypothetical more than anything. It seems that you are at an early stage startup and it will take a long time before anyone becomes interested in taxing your revenues outside of the jurisdiction you incorporated in.

It looks like the language in Article 5 is very similar to the UAE and Europe DTA PE language that I've seen.

Does working from a "vacation" apartment in Europe for one's own company (whether UAE or not, assuming similar language) constitute either office or place of management, say for a consulting firm with clients outside that country? How does one confidently avoid triggering PE with the scenario I described?

Which more aggressive PE versions are there that you've seen, for comparison?

 

[bonox]

No, I'm saying there are no payroll taxes if you are a non-domicile resident in Cyprus whose sole source of income is dividends.

that means you can only take money out once a year right ?

 

[Sols]

that means you can only take money out once a year right ?

You can take out dividends whenever you want, so long as you keep enough money in the company to meet your future obligations. It's not uncommon for small, profitable businesses to distribute dividends on a monthly or bimonthly basis.

 

[bonox]

Is it accepted by the tax offices in Europe to do so? Because that would mean you avoid income tax. Wouldn't they ask you why you take out the money as dividends rather than monthly salary?
Wouldn't they question if the dividends you take out not in reality are monthly salary and need to be taxed?

 

[Sols]

Is it accepted by the tax offices in Europe to do so? Because that would mean you avoid income tax. Wouldn't they ask you why you take out the money as dividends rather than monthly salary?
Wouldn't they question if the dividends you take out not in reality are monthly salary and need to be taxed?

The previous question was specific to Cyprus, where the tax authority does not seem to care. The same goes in many other jurisdictions.

However, I am aware of a few jurisdictions where this has been seen as an issue. In some cases, it's solved by classifying dividends from companies you control a certain percentage of as regular income (salary). Some jurisdictions expect (require) a certain amount of salary to be taken out and the rest can be dividends. Speak with a tax adviser/lawyer where you live to see what the regulations are.

 

[Don]

The previous question was specific to Cyprus, where the tax authority does not seem to care. The same goes in many other jurisdictions.

However, I am aware of a few jurisdictions where this has been seen as an issue. In some cases, it's solved by classifying dividends from companies you control a certain percentage of as regular income (salary). Some jurisdictions expect (require) a certain amount of salary to be taken out and the rest can be dividends. Speak with a tax adviser/lawyer where you live to see what the regulations are.

The common logic is to pay around the market rate of salary and rest can be taken out as dividends.
Otherwise, as you said theoretically the tax official may consider reclassifiying part of the dividends as salary if certain conditions are met, especially if the company completely avoids paying salaries, in order to avoid paying payroll taxes which are often higher. It can also be the other way around.
It depends on many circumstances and as far as Im concerned does not get enforced very often.

 

[European]

The previous question was specific to Cyprus, where the tax authority does not seem to care. The same goes in many other jurisdictions.

However, I am aware of a few jurisdictions where this has been seen as an issue. In some cases, it's solved by classifying dividends from companies you control a certain percentage of as regular income (salary). Some jurisdictions expect (require) a certain amount of salary to be taken out and the rest can be dividends. Speak with a tax adviser/lawyer where you live to see what the regulations are.

Can you name those few jurisdictions? Thanks

 

[taoasher]

Can anyone confirm this, especially the bolded?

I keep looking for the catch with Dubai for the location independent owner that has international business, which I guess is most people on here. It can be much less expensive than many think, main cost seems to be the company and visa which I found can be done under $7k depending on the Free Zone.

If someone incorporates a Dubai company, he gets residence, plus with the new law can even get tax residence in just 3 months. To further prove his "real" residence, for under $10k a small apartment can easily be found. Isn't he then free to go on "vacation" in Europe for 6-9 months per year, being careful to avoid local residence and or creating too many ties on paper just in case, effectively meaning for less than $20k he gets an entirely tax free life, and some holiday in Dubai? What would be the catch, the risk of triggering PE while he's "traveling"?


It looks like the language in Article 5 is very similar to the UAE and Europe DTA PE language that I've seen.

Does working from a "vacation" apartment in Europe for one's own company (whether UAE or not, assuming similar language) constitute either office or place of management, say for a consulting firm with clients outside that country? How does one confidently avoid triggering PE with the scenario I described?

Which more aggressive PE versions are there that you've seen, for comparison?

I am interested in this too.
How likely is PE an issue in reality, while "living" in 2 countries for 3 months a year each