How to create a Permanent Establishment in the Netherlands

What is a Permanent Establishment?

A Permanent Establishment is a fixed place of business, through which the business of an enterprise is wholly or partly carried out. It is not a separate legal entity but rather an extension of the parent company which is situated abroad; factories, offices and construction work for a considerable duration of time are a few examples of a Permanent Establishment.

At the beginning of 2020, some changes were introduced to Dutch tax law with regards to the definition of a Permanent Establishment. These changes came as a result of measures from The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which aimed to prevent the artificial avoidance of a Permanent Establishment status.

Permanent Establishments in the Netherlands

In order to achieve the goals of the MLI, the Netherlands has adjusted the definition of Permanent Establishment in its income tax law, payroll tax law and corporate tax law by simply referring to the definition in the applicable treaties for the avoidance of double taxation. This prevents conflicts between the relevant treaties and national law and ensures the taxing rights of the Netherlands on the PE.

For countries with which the Netherlands has not signed a tax treaty, the definition of a PE in the income tax law, payroll tax law and the corporate tax law was aligned with the most recent version of the OECD Model Tax Convention. It can be found under Article 5 of the OECD Model Tax Convention, which states that a Permanent Establishment is formed when the company doing business from abroad has one of the following in the Netherlands:

• A place of management
• A branch
• An office
• A factory
• A workshop
• A mine, an oil or gas well, a quarry or any other place of extraction of natural resources

In certain circumstances, a building site, construction or installation project can also constitute a Permanent Establishment.

When exploring a market, companies tend to assign employees such as marketing professionals or sales professionals in the desired market, giving them the flexibility to analyse multiple possibilities before fully committing. However, if those employees are authorised to act on behalf of the company, or to conclude contracts on behalf of it, they might be seen as a permanent representative.

Business taxes

Due to the aforementioned changes, which aim to prevent the artificial avoidance of PE Status, in treaty and non-treaty circumstances, it is expected that more cases will trigger a Permanent Establishment than before. Consequently, more foreign entities and freelancers doing business in the Netherlands will be subjected to taxation.

Below, we have listed some of the possible results from creating a PE in the Netherlands.

Dutch corporate income tax

If a PE is created in the Netherlands, it becomes subject to Dutch corporate income tax and annual tax filing. Furthermore, the Permanent Establishment would need to be registered at the Dutch Chamber of Commerce.

Dutch payroll tax and payroll administration

Payroll administration is mandatory if the PE has employees in the Netherlands. Whether the employees of a company should be considered employees belonging to the PE is to be determined on the basis of the relevant circumstances. If that is the case, payroll tax along with social security costs will have to be paid in the Netherlands.

Administration and bookkeeping

The PE will be obliged to run an administration in the Netherlands, which has to be in line with the local and European regulations.