Permanent Establishment as Tax Residency?
Permanent establishment is something that people are usually not aware of, but it is important to consider as it can determine where you have to pay the taxes. Permanent establishment occurs in a different country than where your company is registered, and in a location where the business management and selling goods or services happens. So, if you permanently manage your business from another country, then you have the risk of having a permanent establishment there. For example, if you have an Estonian company, but manage your business in Finland, then this might result in a permanent establishment in Finland and means that taxation will be according to the Finnish tax rules. Besides management location and permanently selling in some country, a permanent establishment might occur if you sign agreements with the clients and negotiate about the prices in some other country than where your company is established. Other aspects can also create a permanent establishment for your company in a foreign country. As taxes are case sensitive, then a tax advisor has to evaluate and analyse the nature of your company’s business and see whether there is a risk for a permanent establishment occurring somewhere else.
So, if the permanent establishment happens, then your tax residency might change, and you have to start paying taxes in that foreign country. In that case, you will be notified about the tax obligations by this country’s government. For example, the Finnish tax office might see that you’re conducting your business in Finland and therefore lets you know that, as you have a permanent establishment in Finland, you have to pay the taxes in Finland and according to their rules.
All the above means that once a permanent establishment occurs, then Estonian regular taxation rules do not apply to your company anymore. So, at the end of the year, you have to pay taxes according to the laws of the country where you have the permanent establishment.
It is important to evaluate all the risks that you have regarding the permanent establishment when starting a business. As mentioned earlier, permanent establishment mainly takes place if you manage the business or sell goods or services permanently in a different country from where your company is established, but there are also many other aspects to consider. So, it is recommended to get a tax consultation before starting a company in Estonia, just to save you money and nerves in the future and avoid arguments with tax offices about where you are obligated to pay the taxes.