Permanent Establishment, Tax, and Foreign Legal Registration

International projects or programs are subject to the laws and regulations of the foreign country where the activity takes place, in addition to applicable U.S. federal and state laws, and projects or programs operating outside the U.S. may trigger a “Permanent Establishment” in the foreign country.

The purpose of this guidance is to provide an overview of “Permanent Establishment” and related tax and legal obligations in other countries.

Permanent Establishment overview

The concept of “Permanent Establishment” generally arises from tax law. When an organization like the University engages in certain levels of activities in a foreign country, a Permanent Establishment may exist or be triggered, causing the institution to be subject to various legal responsibilities in the foreign location. Ultimately, U.S. tax treaties (between the U.S. and the foreign country) or the laws of the foreign country (absent a tax treaty) govern location-specific definitions of “Permanent Establishment.”

Activities that may trigger a Permanent Establishment:

• Leasing or owning office space, a lab, or other real property in the foreign country.
• Sending University employees previously located in the U.S. as expatriates to the foreign country for extended periods (usually more than six months per year) or hiring local or third-country nationals as University employees.
• Hiring independent contractors in the foreign country.
• Opening University bank accounts in the foreign country.
• Generating income or revenue through operations in the foreign country.
• Providing educational services or teaching University courses outside of the U.S.
• Conducting research activity through a fixed place of operation (e.g. offices).
• Conducting regular or continuous activity in the country over a long-term period.

The University’s non-profit status in the U.S. does not apply to creation, or not, of a Permanent Establishment based on the University’s activities in the foreign country. Although the University operates as a non-profit in the U.S. for tax purposes, the laws of the foreign country will dictate whether the University’s activities in the country can be treated in a tax-exempt manner.

When a locale deems that the University has a Permanent Establishment in the country, the University must address its legal (and tax) presence and will be subject to significant obligations in this locale. These include payment of required local taxes and administrative costs in order to comply with local tax and legal requirements. For these reasons, the University strives to arrange its activities to avoid Permanent Establishment issues. If the University fails to take necessary steps to address a Permanent Establishment in a country, it and affiliated researchers, faculty, and/or students could also suffer serious adverse consequences. While these consequences are beyond the scope this guidance, such a failure could jeopardize the ability of a particular project to continue and could significantly harm the reputation of the University, its faculty, staff, and students operating in the location.

Determining whether a University project or program rises to the level of a Permanent Establishment may require the advice of external legal and/or tax experts. It is important to remember that no two counties are the same, and acceptable activity in one locale may not be acceptable in another. For activities that could give rise to a Permanent Establishment, Global Engagement, the Office of Counsel, and University Finance must be consulted in the earliest stages of planning as possible to assess Permanent Establishment issues.