Expanding to the Netherlands? Understand the Permanent Establishment and Corporate Tax Risks

Expanding your business internationally is an exciting milestone. At a certain point, your sights may be set on expanding your business across borders to unlock further growth opportunities. Thanks to digitalization and remote working, it is now easier than ever before to start operating across borders. Part of your team may already work remotely, many of your meetings take place online, and you may already have foreign customers.

For international businesses expanding into the Netherlands – or Dutch businesses taking their first steps abroad – these developments make international growth increasingly accessible. At the same time, they also make it easier to create tax obligations in another country without immediately realising it.

We regularly see businesses taking the next step by building a light local presence to test the waters in a new market. This may involve hiring one or two employees and possibly renting a small office with your sign on the door.

While you may be well-established in your home market, entering a new market means navigating a different legal, regulatory and tax environment. This brings both opportunities and risks that require careful consideration. While incorporating a local legal entity may still seem years away, even a relatively light local presence could already have significant tax implications that are easy to overlook.

What is a permanent establishment?

From an operational perspective, expanding internationally through your existing legal entity is often an attractive option. It keeps the structure lean and avoids the need to establish a local subsidiary. However, tax obligations do not always follow the legal structure. Even without incorporating a local subsidiary, a business may create a taxable presence in a foreign country. This concept is referred to as a permanent establishment (PE).

A permanent establishment is a taxable presence of your domestic entity in another country. If a permanent establishment exists, that country may be entitled to tax part of your business’ profits. As a result, your business may be required to register with the local tax authorities and comply with local filing, reporting and payment obligations. Depending on the circumstances, a permanent establishment may also trigger payroll tax obligations, potentially affecting the tax position of employees working in that country.

The issue is not necessarily that a permanent establishment exists. Operating through a permanent establishment can be a perfectly suitable structure. The risk arises when a permanent establishment exists without the business being aware of it. Corporate income tax registrations, historical filings and potentially payroll obligations may then need to be addressed retrospectively, resulting in additional costs, administrative work and management time.

How can a permanent establishment arise?

Permanent may establishments arise through either a fixed place of business or through the activities of local employees and agents.

Permanent establishment through a fixed place of business

This generally requires a location through which business activities are carried out and that has a certain degree of permanence.

In practice, we commonly see a permanent establishment arise when a business rents office space, opens a branch location or otherwise establishes a physical presence in a foreign country. Hiring local employees who perform core business activities from that location further increases the likelihood of triggering a permanent establishment.

The rise of remote working has made this increasingly complex. We regularly see businesses assume that a permanent establishment requires a traditional office. However, depending on the circumstances, nowadays even a desk or office space in an employee’s home may create a permanent establishment. As countries do not always take the same approach to home office situations, the outcome may also vary between jurisdictions.

For an international business with employees working from the Netherlands, it is therefore important not only to consider the employee’s individual tax and payroll position, but also whether their presence and activities could create a taxable presence for the foreign company in the Netherlands.

Permanent establishment risks from employees and sales agents

A permanent establishment is not limited to situations involving a physical location. In practice, we also regularly see permanent establishment risks arise through the activities of employees and sales agents operating in a foreign market.

Historically, the focus was often on the individual’s authority to formally sign contracts on behalf of the business. Nowadays, many countries take a broader approach. A permanent establishment may already arise when an employee or sales agent has an important role in negotiating contracts for the business. The location and individual that signs on behalf of the business have therefore become less relevant.

In practice, we see that job titles such as Sales Manager, Country Manager, Market Manager or Business Development Manager often attract attention from tax authorities. This may prompt tax authorities to take a closer look at the employee’s actual responsibilities and level of involvement in commercial activities.

We also regularly see situations where the employee is formally employed by another entity in the country concerned, for example through an Employer of Record (EOR), while the foreign business remains the de facto employer. Depending on the circumstances, this may not always eliminate the permanent establishment risk.

An EOR may solve certain local employment and payroll requirements, but for corporate tax purposes the actual activities performed by the employee on behalf of your business remain relevant. Using an EOR should therefore not automatically be considered a solution to permanent establishment risks.

What happens if your business has a permanent establishment?

If a permanent establishment exists, part of the profits of the foreign business may need to be attributed to that permanent establishment and taxed locally. This generally also brings local corporate income tax registration, filing and documentation requirements.

The impact therefore goes beyond the amount of corporate tax due. It may affect how profits are allocated between countries, how your administration is organised and, depending on the circumstances, how employees are handled from a payroll tax perspective.

For foreign businesses with a permanent establishment in the Netherlands, this can mean becoming subject to Dutch corporate income tax and related Dutch tax compliance requirements for the activities attributable to the Dutch permanent establishment.

This is why it is important to identify a potential permanent establishment at an early stage. When the position is understood upfront, the necessary registrations and processes can be organised accordingly and the structure can be assessed against the broader commercial objectives of the business.

Choosing the right structure for international expansion

Business always comes first and tax follows.

In many cases, a light setup in a new market is the right commercial decision and operating through a permanent establishment may in such case be perfectly aligned with your commercial and operational objectives. We support many clients that successfully operate through a permanent establishment structure, either in the Netherlands or abroad.

However, permanent establishment risks should be on your radar and form part of the decision-making process when entering a new market. While a light setup may be the most practical solution initially, it is not always the most efficient solution in the longer term.

At Bol International, we challenge businesses to look beyond the first steps of their international expansion and consider their medium and long-term ambitions. A structure that works well today may no longer be fit for purpose once the business gains traction. As a result, transitioning at a later stage can be more complex and costly than anticipated.

In some cases, establishing a local subsidiary from day one may be the more suitable option. Besides providing operational flexibility, it may also help ringfence certain tax risks and centralize local tax obligations in the country where the activities take place.

The important question is therefore not simply whether a permanent establishment should be avoided. It is whether the structure you choose supports your business today and remains appropriate as your activities grow. 

Looking beyond your first steps in the Netherlands or abroad 

Expanding internationally requires a clear understanding of both the domestic and foreign tax implications of your business model. Through our international network of trusted partners, we combine local Dutch expertise with insights from your home jurisdiction, helping you align tax considerations on both sides of the border and make informed decisions as your business grows.

Whether you are a foreign business expanding into the Netherlands or a Dutch company establishing activities abroad, looking at the structure before your local presence develops further can help prevent unexpected corporate tax and compliance obligations later.

Planning to expand into the Netherlands or establish a presence in another country? Our international tax specialists can help you assess whether your activities could create a permanent establishment and whether your structure still fits your medium and long-term ambitions. Feel free to contact us to discuss your plans.