For many US MNEs, European expansion begins with a single GEC. In practice, a Dutch BV is often chosen considering its flexible corporate law regime and the beneficial Dutch tax regime. A GEC can be an efficient way to centralise governance, contracting, and support functions while the European business is still scaling. As the business grows, that same GEC may start hiring employees in other European jurisdictions before a local subsidiary is incorporated. While this is a common and practical expansion model, it raises an important PE question: can those local employees create a taxable presence of the GEC in the jurisdictions where they work?

The answer largely depends on the employees’ activities. Support, market research or other activities of preparatory or auxiliary nature present lower PE risk. However, the risk increases where local activities form part of the core business of the enterprise. For example, if employees in the jurisdiction are involved in managing relationships, supervising service delivery or otherwise perform (strategic) functions that are integral to the business, the PE risk increases. As such, internal functions generally carry lower PE risk.

For sales and business development activities, the agency PE analysis is often critical. Under the applicable treaty a PE may arise where an employee habitually concludes contracts on behalf of the GEC. Under the Multilateral Instrument’s expanded agency PE concept, formal signing authority is not necessarily decisive. PE risks may also arise where an employee habitually plays the principal role in securing contracts that are routinely concluded without material modification.

Home-office PE considerations are also relevant. Where employees structurally work from a home office or other location with no local office premises available, the home-office PE guidance discussed in the first Snippet of this PE series should be considered. A home-office carries increased PE risk where the employee spends ≥50% of their time working from home and there is a commercial reason for having the employee in the jurisdiction.

Before hiring locally, US MNEs should carefully assess the employee’s functions, decision-making and customer-facing authority; determine for which group company the activities are performed and monitor home-office arrangements. If a PE exists, timely local registration should be considered. If the position is uncertain, advance tax certainty or a no-PE ruling may be worth considering where available.

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