How to avoid creating Permanent Establishment in Europe?

[Don]

+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 for︀ companies, so it might not be suitable for everyone. Treating individuals as independent contractors while︁ they perform the function of a full-time employee is an illegal business practice that many︂ governments are beginning to recognize and penalize companies that make this misstep.

 

[FixieHartmann]

I would be technical co-founder, industry is B2B⁢ saas and size of the company is very small, basically just 2-3 founders and no︀ employees (in the beginning at least).

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

However I think for the︂ PE risk I would refer to what Sols said and basically prefer a jurisdiction that︃ 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 is︀ what you want.

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

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

The only other thing I will add︄ is that PE risk is likely to be hypothetical more than anything. It seems that︅ you are at an early stage startup and it will take a long time before︆ 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 if︇ you want advice.

 

[Radko]

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

 

[FixieHartmann]

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

 

[Nomade]

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 the︀ company and visa which I found can be done under $7k depending on the Free︁ Zone.

If someone incorporates a Dubai company, he gets residence, plus with the new law︂ 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 to︄ go on "vacation" in Europe for 6-9 months per year, being careful to avoid local︅ residence and or creating too many ties on paper just in case, effectively meaning for︆ 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 looks️ 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]

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

 

[Sols]

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]

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 solved︀ 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 the︂ rest can be dividends. Speak with a tax adviser/lawyer where you live to see what︃ the regulations are.

 

[Don]

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

 

[European]

Can you name those few jurisdictions? Thanks

 

[taoasher]

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