Requirements for Management and Permanent Establishment

Why Substance Matters

A real place of management and a proper permanent establishment are the basis for tax recognition of your company, both at home and abroad. The place of management is a key factor for tax authorities everywhere. A proper permanent establishment matters most in Europe, but it also counts in many other countries.

Tax and social security authorities run regular checks. They look at the country where the company is based and, often, the authorities in other countries as well. They use set criteria to decide whether your company has real economic substance, or whether it is just a sham company.

Tax authorities look mainly at tax recognition and at any attempt to avoid tax. Social security authorities look at something else: whether real business activity is happening on the ground. This matters most when the company has staff, or when directors must pay social security in a given country.

The Proper Permanent Establishment Where the Company Is Managed

In the European Union, and in many countries outside the EU, a proper permanent establishment is the proof tax authorities want. It shows the company is a real, working business and not a sham company (a letterbox or ghost company).

Most countries set no exact legal minimum for a proper permanent establishment. But there are clear signs that authorities, at home and abroad, use to judge a company's economic substance and real activity.

Whether it is believable: indicators of a functioning permanent establishment

A working permanent establishment does not have to meet a fixed legal standard. But it must make sense for the kind of business you do. The key point: the premises must clearly be used for the business and have the right setup.

Here, authorities look closely at whether the fit-out, layout, and use of the premises match what the company says it does. A plain address, or empty premises with no activity, will usually not pass.

Structural requirements for a permanent establishment

To help your company be recognised for tax and not be treated as a sham company, you should usually meet the following:

• The premises should be a real, identifiable space. They should not be only a letterbox address, and should not rely only on a virtual office.
• The premises should have their own entrance. This can be inside an office building or business centre, as long as the office is a separate unit and is used only by the company.
• The premises should lock and be separate from other units. A desk in a shared co-working space, with no real separation, is usually not enough.
• The fit-out should match the business. This means a working office with a desk, a computer, and the rest of the setup you need.
• The technical setup should be there and working. This means, above all, an internet connection, business email addresses, and a dedicated phone line for business calls.
• Being reachable by phone in business hours is an important sign. Authorities usually expect the company to answer during normal business hours and, where the business needs it, to have a contact on site. This is true above all for businesses where physical presence is part of the work, such as shops or production sites.
• Storage or production space is needed where the business calls for it. A trading company should have enough storage, and a maker of goods should be able to show machines or other production facilities.

A working permanent establishment is not just about having premises. It is about real, visible use and a setup that makes sense for the business. The key test is whether it is believable. The premises should genuinely be needed for the business, properly equipped, and actually used.

Tax offices abroad check these points mainly to confirm the company is not a purely formal shell with no real substance. Meeting these requirements helps with tax recognition and legal certainty.

Particular relevance for invoicing companies abroad

A proper permanent establishment matters most when a company sends invoices to business partners abroad, above all inside the European Union.

The tax authorities in the recipient's country run spot checks. They look at whether the invoice really came from a company that is active abroad, or whether it points to a sham company. Here, the signs set out above play a central role.

In the company's home country, the check is mainly about whether it is believable. Tax offices abroad often apply stricter standards to the permanent establishment. In many cases they work to fixed criteria when they decide whether a company is really active.

If your company's invoice is not recognised for tax, the recipient may lose the right to claim the business expense. This can lead to tax reassessments and, in some cases, further legal trouble.

So a proper permanent establishment and real, visible business activity are essential to avoid problems with tax recognition abroad.

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