We live in a world where it has become quite common to be a citizen of one country, reside in another, and work or run a business in a third. Our living and business management in a cross-border regime bring changes in tax obligations, demanding greater attention to compliance and regulations.

By proactively assessing risks and consequences many potential issues can be avoided. However, neglecting this area can lead to increased scrutiny from tax authorities.

In this context we are starting a series of articles focused on cross-border taxation. We will cover some theoretical questions, legislative regulation and practical view on this complex matter from a business and individual perspective. In this first article we focus on the concept of permanent establishment (PE).

The modern regulation of permanent establishments originates from the OECD Model Tax Convention on Income and Capital and the United Nations Model Double Taxation Convention between developed and developing countries. These frameworks aim to clarify, standardize and define the fiscal rights of taxpayers engaged in international business activities, applying common solutions to the challenges of double taxation.

The OECD Model Tax Convention is the most widely adopted standard for defining permanent establishment globally, forming the basis tax treaties. For instance, here is the list of double taxation agreements with Estonia (62 of them are in effect).

Double taxation treaties, signed between Estonia and other countries

The core purpose of the permanent establishment concept is to define the right of a country to tax the profits of an enterprise from another country. According to Article 7 of the OECD Convention, a country can only tax the profits of a foreign enterprise if it operates through a permanent establishment within that country.

But what exactly does “permanent establishment” mean?

As outlined in the OECD Convention and similar tax treaties, a permanent establishment is a fixed place of business where the activities of an enterprise are carried out, either fully or partially.

There is a detailed list of what can be considered as PE:

a place of management
a branch
an office
a factory
a workshop
a mine, oil or gas well, quarry, or any other site of natural resource extraction

To qualify as a permanent establishment three key conditions must be met:

There must be a place of business—a physical location such as premises or, in some cases, machinery or equipment;
The place of business must be fixed—meaning it is located at a specific place with a degree of permanence;
The business must be conducted through this fixed location, typically by personnel dependent on the enterprise.

Understanding whether your business or professional activities constitute a permanent establishment is critical because it determines your liability for local taxes in a foreign jurisdiction. If a PE is established, a business may be required to pay corporate taxes on profits generated there, and individuals may be subject to income tax.

Failing to comply with PE regulations can result in serious consequences, including penalties and legal disputes for businesses. For individuals, this could lead to unexpected tax liabilities, especially if they face taxation in both their home and host countries—potentially resulting in double taxation unless a treaty is in place to prevent it.

Navigating the intricacies of permanent establishment rules, whether for a business or individual, requires a thorough understanding of international tax laws and the specific regulations of the countries involved. Our law firm specializes in helping clients assess their cross-border activities, determine if a permanent establishment exists, and manage any resulting tax obligations effectively.

For personalized advice or for your case review – contact us.

In the following articles we will take a closer look at how PE is regulated, how local tax authorities in different countries interpret this concept, whether an employee residing in another country can establish PE, what tax applies to the income of a company or individual earned in the country of PE, and what can be done to prevent a company’s activities in a particular location from being recognized as PE.