Has Your Contractor Created A Permanent Establishment With Their Limited Company?

globalIn the cross border contingent workforce arena it is not uncommon for a worker to be engaged on a project through their Personal Services Company (PSC), also known as their limited company. However, the risks associated with this approach, all of which are open to everyone in the contract chain, are often not understood or otherwise overlooked. Having rattled around in this industry for over 14 years and hearing all manner of excuses as to why a contractor ‘must’ operate this way, I thought it was time to put my opinions into a blog.

Most risks associated workers and their PSCs arise when the majority of the PSC’s income is generated by one source, the contractor. There are still risks should a group of contractors operate through a single company with the turnover (revenue) being generated from a multiple locations, which I’ll address in another blog post. In all cases the risks lay with the company being deemed to have created a permanent establishment (PE) in the host country.

Googling the term permanent establishment will yield more than 7 million results, so it is safe to say that there is a great deal of literature already produced on this subject. For me however, I think the subject of PSC’s creating a PE can be described as the “Paul Young Effect.” As per the lyrics of his song “wherever I lay my hat that’s my home” (or in this case, wherever the company is laying its hat). Since the majority of the turnover is generated in the host state and the management of the company is located in that country, it is likely to be considered that the legal seat of the company has now moved to the host country. A PE has now been created and it will be from the point when the company started trading in that country.

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So what does this all mean and what effect could it have on the contract chain?

It means that the PSC is now operating as a branch in the host country and must work within the financial and employment laws of that country. This could create additional corporate and payroll administration requirements, tax liabilities plus the need to gain employment and/or trading licenses for their “branch.” Failure to adhere to these laws will leave the officers of the PSC open to prosecution with potential fines and in extreme cases imprisonment as the punishment.

If it were proven that the company’s affairs or its employees taxes are not managed lawfully, then the host government could look at the other participants in the contract chain for recompense. The most likely candidate for this will be the local end user of the contractor’s services, the corporation funding the project. They are a registered entity in that country so must comply with the laws plus they are likely to have a healthy balance sheet that would make them worth chasing. Plus, there is the chance of negative PR being generated by trade or national press.

All of this can be avoided, though, if the recruitment industry were to listen to the specialists in this market rather than the contractor who has “worked this way all his life.” There are a number of providers out there whose business it is to mitigate these risks. They have conducted the correct level of research to ensure they are aware of all rules and will keep the contract chain the right side of them. They will have corporate structures in place to correctly manage all aspects of the contingent workforce.

I find that subject is the most misunderstood area of cross border recruitment and hopefully this blog will go some way towards switching on the lights.

MORE: Data privacy and compliance


Ray Walker

Ray Walker
Ray Walker is director of IF Contracting. His expertise lies in ensuring freelancers meet their worldwide tax obligations and maximize their earnings simultaneously.

Ray Walker

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