May 5th, 2021
A Permanent Establishment is a fixed place of business, through which the business of an enterprise is wholly or partly carried out. It is not a separate legal entity but rather an extension of the parent company which is situated abroad. Factories, offices and construction work for a considerable duration of time are a few examples of a permanent establishment.
At the beginning of 2020, some changes were introduced to the Dutch Tax Law with regards to the definition of a Permanent Establishment in the Netherlands. These changes were a consequence of the entering into force of the measures from The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), aiming to prevent the artificial avoidance of a Permanent Establishment Status.
In order to achieve the goals of the MLI, the Dutch Government has adjusted the definition of Permanent Establishment in its Income Tax Law, Payroll Tax Law and Corporate Tax Law by simply referring to the definition in the applicable treaties for avoidance of double taxation. This prevents conflicts between the relevant treaties and national law, and ensures the taxing rights of the Netherlands on the permanent establishment.
For the countries with which the Netherlands has not signed a tax treaty, the definition of a P.E. in the Income Tax Law, Payroll Tax Law and the Corporate Tax Law was aligned with the most recent version of the OECD Model Tax Convention. It is to be found under article 5 OECD Model Tax Convention and it states that Permanent Establishment can be formed when the company doing business from abroad has one of the following in the Netherlands:
– a place of management;
– a branch;
– an office;
– a factory;
– a workshop;
– a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
In certain circumstances, a building site, construction or installation project can also constitute a permanent establishment.
Furthermore, when exploring a market, companies tend to assign employees such as marketing professionals or sales professionals in the desired market. That gives them the flexibility to analyze the possibilities before fully committing. If those employees however, are authorized to act on behalf of the company or to conclude contracts on behalf of it, they might be seen as permanent representative.
Due to the above mentioned changes which aim to prevent the artificial avoidance of P.E. Status, in treaty and non-treaty circumstances, it is expected that more cases will trigger a Permanent Establishment than before. Consequently, more foreign entities or freelancers doing business in the Netherlands will be subjected to taxation.
Possible results from creating a Permanent Establishment in the Netherlands.
Below, we have listed some of the possible results from creating a P. E. in the Netherlands.
Dutch Corporate Income Tax
If a P.E. is created in the Netherlands, it becomes a subject to the Dutch Corporate Income Tax and annual tax filling. Furthermore, the Permanent Establishment would often need to be registered at the Dutch Chamber of Commerce
Dutch Payroll tax and Payroll Administration
Payroll administration is mandatory if the P.E. has employees in the Netherlands. If the employees of a company should be considered employees belonging to the P.E. is to be determined on the basis of the relevant circumstances. If that is the case, payroll tax along with social security costs will have to be paid in the Netherlands.
Administration and Book Keeping
The P.E. will be obliged to run an administration in the Netherlands which has to be in line with the local and the European regulations.
Broadstreet can support you every step of the way, from assessing your chances of triggering a P.E. in the Netherlands to filling your corporate income tax returns, running your payroll administration as well as take care of your day to day administration. Contact us for more information.
Other news about Permanent Establishments in the Netherlands
- Permanent establishment in the Netherlands; rules tightened