10 August 2023

Things you need to know about setting up a foreign permanent establishment

by Febe Louage and Nico Demeyere

Do you have employees working abroad? Or are you planning to hire people outside of Belgium in the near future? If so, it is quite possible that a 'foreign permanent establishment' will be created along with their presence. This could be the case, for example, if you have an office abroad, carry out work on a construction site or if your sales staff can negotiate contracts abroad. But what does this mean for your company? An overview.

Allocation of profits to a permanent establishment

If your company effectively has a foreign permanent establishment, a market-based profit will also be allocated to that permanent establishment. To regulate the distribution of profits between the head office and the permanent establishment, our country follows the OECD's AOA, or Authorised OECD Approach. Under this approach, a market-based profit should always be attributed to the permanent establishment. This corresponds to the profit that would be generated should the permanent establishment act as a separate and independent enterprise carrying out the same or similar functions, under the same or similar circumstances. The AOA comprises two steps:

  • The first step involves a thorough functional and factual analysis to determine who has economic ownership of assets, as well as who bears certain risks. In addition, any transactions between the permanent establishment and the head office, also known as 'dealings', should be clearly identified.

  • For the second step, a market-based price for such dealings is determined based on the overarching transfer pricing regulations.

To avoid paying double tax, it is therefore essential to make a well-founded profit allocation.

Transfer pricing documentation

With the creation of a foreign permanent establishment, your business may suddenly become recognized as a multinational group. In that event, documentation requirements may also apply, either in Belgium or abroad. These obligations apply from the moment your business exceeds one of the following criteria at individual group entity level:

  • A total of EUR 50 million in operating and financial income, excluding non-recurring income

  • A balance sheet total of EUR 1 billion

  • An average annual workforce of 100 full-time equivalents

If this is the case, as a multinational group you will have to prepare a master file and a local file in Belgium. As these obligations and thresholds vary from country to country, it is best to find out what formalities apply in the country where the permanent establishment is located.

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Febe Louage

Senior Advisor International

Nico Demeyere

In our opinions, we rely on current legislation, interpretations and legal doctrine. This does not prevent the administration from disputing them or from changing existing interpretations.

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