Expanding into a new market is an exciting milestone for any business, but it requires strategic
decisions. One critical choice is whether to establish a Permanent Establishment (PE) or a
subsidiary in the foreign jurisdiction.
Each option has unique legal, operational, and tax
implications, and the decision depends on the company’s objectives, the regulatory environment,
and the nature of its activities.
What is a Permanent Establishment (PE)?
A Permanent Establishment (PE) is a fixed place of business in a foreign jurisdiction through which a
company conducts substantial activities: they are typically created when a business operates in another country without establishing a separate legal entity.
Key Characteristics of a Permanent Establishment:
Direct Presence: The parent company operates directly in the foreign country.
Examples: A branch, office, factory, or construction site exceeding a specific duration.
Taxation: Profits attributable to the PE are subject to tax in the host country.
What is a Subsidiary?
A subsidiary is a separate legal entity established in a foreign jurisdiction, owned or controlled by the parent company. Unlike a PE, a subsidiary has its own legal and tax identity and is subject to the laws of the host country.
Key Characteristics of a Subsidiary:
Separate Legal Entity: The subsidiary operates as an independent company.
Examples: Private limited companies, joint ventures, or wholly owned enterprises.
Taxation: The subsidiary’s profits are taxed in the host country, and dividends paid to the parent
company may be subject to withholding tax.
Key Considerations
Business Activities: A PE is ideal for testing markets or limited operations.
Subsidiaries suit long-term investments or significant activities.
Tax Implications: Analyze local tax rates, double taxation treaties (DTAs), and profit
repatriation strategies.
Regulatory Requirements: A PE involves fewer formalities but may require specific
registrations. Subsidiaries must adhere to incorporation, reporting, and compliance rules.
Risk Management: Subsidiaries shield the parent company from direct risks, while
PEs offer simplicity but greater exposure.
Exit Strategies: PEs are easier to dissolve, while closing a subsidiary can be
complex and time-consuming.
Hybrid Approaches
In some cases, businesses may adopt a hybrid approach, starting with a PE to test the market and later transitioning to a subsidiary for expanded operations. This phased strategy allows businesses to adapt as their needs and goals evolve.
LEXeFISCAL: Your Partner in Transfer Pricing Compliance
At LEXeFISCAL, we specialize in advising businesses on international structuring and tax strategies.
Whether you’re considering a Permanent Establishment or a subsidiary, our team can help you!
Expanding into new markets is a significant milestone.
Contact us today to discuss how we can support your journey with tailored, expert advice
Email: info@lexefiscal.com
Tel: +44 (0)208 092 2111
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