Remote-first work can widen the potential talent pool and deliver new business opportunities for startups. However, building a remote, globally distributed team can come with tax considerations and risks. Permanent establishment is one potential risk because it can create unforeseen tax obligations if a company’s remote workforce establishes a business presence abroad.
Below, we’ll discuss what permanent establishment is, what happens when it’s created in another country, and how startups can reduce and manage their permanent establishment exposure.
Key takeaways
Permanent establishment is a tax consideration for startups with remote, global teams. Companies can create a permanent establishment by having a sufficient business presence in a foreign country, as defined by local tax codes and international tax treaties.
For remote-first startups with a global team, common triggers for permanent establishment include maintaining a fixed place of business abroad, your employees or contractors regularly working from another country, and signing contracts in a foreign location.
Once your company has created a permanent establishment in another country, it can be liable for local corporate taxes, double taxation, and tax penalties. Founders are advised to seek the advice of counsel to navigate complex permanent establishment rules before adding international headcount.
What is permanent establishment?
Permanent establishment is a tax concept that determines how much business activity a company can have in a foreign country before it’s required to pay corporate taxes there. Permanent establishment rules vary by country based on different tax codes and treaties, but generally, the more business presence a company has in another country, the greater its permanent establishment exposure.
One way to establish a permanent establishment overseas is to have a physical location in another country. However, other factors can trigger permanent establishment even if your business doesn’t formally register as a local entity or open an office in that country. For example, remote employees who work abroad and regularly sign contracts may create a permanent establishment, resulting in corporate tax requirements in that country.
How can remote work create permanent establishment risk for startups?
Permanent establishment rules can vary by country, but there are several common triggers for founders to be aware of. Your remote startup might face permanent establishment risk if it:
Has employees or contractors regularly working from another country: A single senior hire working consistently from abroad can be enough to raise permanent establishment risk under certain tax treaties.
Maintains a fixed place of business abroad: Having a “fixed place of business” abroad, in tax terms, might mean opening an office or establishing a place of management in another country.
Signs contracts in a foreign jurisdiction: Staff who regularly negotiate or sign contracts on your company’s behalf in another country can create a permanent establishment there.
Why does permanent establishment risk matter for global, distributed teams?
Remote-first startups can face more permanent establishment exposure. With a globally distributed team, your company could be at risk of unintentionally establishing a business presence abroad, which can have consequences.
Permanent establishment can result in unexpected foreign tax filing requirements, double taxation, and tax penalties for missing or incorrect filings. Additionally, the administrative burden of mitigating that risk can distract a small team from essential work.
What are some common triggers for permanent establishment?
For startups with remote teams, here are some common scenarios that could trigger permanent establishment, beyond opening an office abroad.
Sales employee in another country closes deals locally: A sole international employee generating local revenue might be enough to create a permanent establishment, depending on local tax rules and treaties.
Long-term remote hire performs core business functions abroad: Signing contracts from another country can trigger permanent establishment.
Founder relocating internationally: If a founder moves but is still actively running their US company’s operations day to day, this may create permanent establishment exposure in their new country.
How do you reduce and manage permanent establishment exposure?
General risk mitigation approaches to manage permanent establishment exposure include:
Using an employer-of-record (EOR) for international hires: An EOR is a third-party service that can help reduce permanent establishment risk by becoming the legal employer for an international team.
Limiting contracting authority for overseas staff: Having staff sign contracts from abroad can trigger permanent establishment, so limiting your remote team’s business functionality may help reduce your permanent establishment exposure.
Consulting cross-border tax counsel: Permanent establishment rules can vary by country, and are often shaped by tax treaties and local tax codes, so it’s generally recommended that startups seek specialist legal and tax advice before expanding headcount abroad.
How can founders check for permanent establishment risk?
As your business needs and staffing requirements evolve, so will your permanent establishment risk. If you have a globally distributed team, consider a quarterly review with counsel to check your permanent establishment exposure and minimize unexpected tax issues and reputational risks.
Here are a few questions to help you assess your permanent establishment risk:
How many days are key staff spending in a given country? Regular, ongoing business activity in another country can trigger permanent establishment.
Who has contracting authority abroad? Employees signing contracts on behalf of your company from another country can be a factor in establishing business presence there.
Are there any relevant tax treaties? There may be tax treaties between countries your business operates in that specifically address your situation.
How Stripe Atlas can help
Stripe Atlas handles everything you need to legally launch your company—incorporation, Employer Identification Number (EIN), equity setup, and tax filings—so you can fundraise, open a bank account, and start accepting payments in as little as two business days, from anywhere in the world.
Join 100,000+ startups incorporated using Atlas, including startups backed by top investors like Y Combinator (YC), a16z, and General Catalyst.
Get started in minutes with Atlas
The application takes under 10 minutes. You’ll choose your company structure, confirm your name is available, add up to four cofounders, set your equity split, and e-sign. Then Atlas takes it from there, including notifying cofounders to sign their documents electronically.
Banking and payments before your EIN arrives
Atlas files your EIN application automatically after incorporation. You don’t have to wait—Atlas enables pre-EIN payments and banking so you can start accepting payments and making transactions right away. US founders with a Social Security number (SSN) are typically eligible for expedited IRS processing.
Automatic 83(b) tax election filing
Atlas files your 83(b) election for you—US and non-US founders alike—with US Postal Service (USPS) certified mail and tracking to reduce personal income taxes. You’ll get a signed 83(b) election and proof of filing directly in your Stripe Dashboard, with certified mail confirmation.
World-class company legal documents
Atlas provides all the legal documents you need to start running your company, drafted by Cooley, one of the world’s leading venture capital law firms, and stores them directly in your Stripe Dashboard. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution, and tax compliance.
$2,500 in Stripe credits, plus $50K+ in partner discounts
Atlas startups get $2,500 in Stripe product credits for their first year, plus $50,000+ in partner discounts on essential tools like AWS, Google, Xero, Perplexity, and more. Delaware registered agent service is also included free for your first year.
Learn more about how Atlas can help you set up your new business quickly and easily, and get started today.
FAQs about permanent establishment risk
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.