Expanding Globally: How to Operate Without a Local Entity

The world is more connected than ever, and mining technology and service companies are no exception. As they expand their reach globally, they need to follow their clients to new markets, from a copper mine high in the Andes to the icey cold winters of Northern Canada. But with this global expansion comes a set of unique challenges and risks—especially when entering a new country without a legal entity already in place.

For suppliers entering new markets, one of the main concepts to learn about is Permanent Establishment (PE). It refers to a situation where a company is deemed to have a “taxable presence” in a country, even if it hasn’t formally incorporated there. This can trigger local tax obligations on the revenue earned in that jurisdiction. The challenge is navigating this complexity without unnecessarily triggering a PE and facing unexpected tax liabilities.

Below we focus on the key factors that could create a PE, such as having a physical presence in the country, hiring local employees, or staying for extended periods providing services. Industiral technology and service companies need to be strategic about how they enter a market, ensuring they don’t overstep the boundaries that would classify their activities as a PE. Understanding local tax laws and regulations, as well as utilizing proper structures (like temporary arrangements or local agents), can help minimize the risk of becoming subject to local taxes.

Permanent Establishment: What Does It Mean for Suppliers?

Permanent Establishment, or PE, refers to when a company is considered to have a “taxable presence” in a country, even if it hasn’t formally set up a local business entity. This means that the company may be required to pay taxes on the revenue it generates within that country.

For suppliers entering new markets, PE can be a tricky issue. If your company is new to a market or is only working with a small client base, you may not want to take on the costs of incorporating a local entity just yet. These costs—such as legal fees, accounting, and ongoing compliance—can add up quickly.

But, if you’re operating in a market for a long time or generating revenue from that location, you will likely trigger PE and be forced to either incorporate or work with a local agent. Here’s what triggers PE and what you need to watch out for.

What Triggers Permanent Establishment?

1. A Physical Presence: Having a fixed place of business, like an office, bank account, or even just an address in the country, can trigger PE. This is especially important for mining companies setting up temporary offices or equipment in a foreign market.

2. Revenue-Generating Activities: If you’re conducting activities—like exploration, sales, or providing services—that directly relate to earning revenue in that country, you could also create PE.

3. Providing Services for 183+ Days: If your staff is in-country for more than 183 days in a given year for training, implementation, or service work, you might be considered to have PE. This is cumulative, so even if your team visits several times over the year, it could still add up.

Common Scenarios Suppliers Should Watch For

1. Hiring Sales or Support Staff: It’s tempting for suppliers to hire business development or sales employees before fully incorporating a company in a new country, often disguising it as a consulting role. However, if these employees are directly involved in generating revenue, their presence can trigger PE.

2. After-Sales Support Staff: Hiring technical staff to provide ongoing support or training after a contract is signed might seem like a temporary arrangement. But many countries will view these workers as employees, which could trigger PE. Even if you classify them as consultants, their role could still lead to a taxable presence.

3. On-the-Ground Training and Implementation: If your team is on-site for more than 183 days in any given year to implement technology, train local workers, or support the project, you’re likely creating PE. This can lead to unexpected tax obligations.

The Dilemma: To Incorporate or Not to Incorporate?

For suppliers venturing into a new market, the decision to set up a local entity is often a tough one. The costs of incorporating and maintaining an entity can be daunting—especially when you’re still working on building traction in that market. It’s the classic “chicken or egg” dilemma: You want to see success before committing to the expenses of a local operation, but as soon as you start generating revenue, the risk of being classified as a PE increases.

Hiring consultants early on may seem like a low-risk move, but as you win more contracts and grow your revenue, the risk of retrospective tax claims increases. That’s why it’s crucial to understand how PE works and develop strategies to minimize your exposure to it.

How to Avoid the PE Trap?

When exploring new markets, suppliers need to ask themselves: How can we establish a presence without triggering PE? It’s all about finding the right balance—evaluating factors like the size of the contract, the type of services provided, and how much time your staff will spend in-country.

To avoid triggering Permanent Establishment (PE) when expanding into new markets, mining companies should:

1. Understand Local Tax Laws: Each country has its own criteria for PE, which may vary based on local laws and Double Taxation Agreements (DTAs). Consult local experts to navigate these rules.

2. Limit Physical Presence: Avoid setting up a permanent office or infrastructure. Minimize the time staff spends on-site, especially if it exceeds 183 days in a year.

3. Use Local Agents Carefully: Engage local agents or contractors for specific tasks, but ensure they don’t directly generate revenue or have authority to sign contracts.

4. Limit On-the-Ground Activities: Keep deployments short-term to avoid crossing the 183-day threshold, which could trigger PE.

5. Structure Contracts: Design contracts to ensure local staff or contractors are not involved in revenue-generating activities that would lead to PE.

6. Consult Local Experts: Work with tax advisors to structure operations efficiently and avoid unnecessary tax liabilities.

By strategically planning market entry and maintaining a minimal physical presence, suppliers can avoid creating PE while expanding internationally.

The Takeaway

Understanding and managing Permanent Establishment risks is key to safely navigating international tax rules. While setting up a local entity may not always be necessary at the start, companies need to evaluate the situation carefully and make informed decisions as they expand. Each market has its own definition of what constitutes PE, so legal advice is essential to steer clear of costly mistakes.

The good news? By taking the time to understand how PE works and planning ahead, suppliers can manage their tax liabilities while expanding into new, profitable markets. Keep in mind that avoiding the PE trap isn’t about avoiding a presence altogether—it’s about finding the right way to enter the market while minimizing unnecessary risks.

Ax Legal helps industrial technology, engineering, and service companies to navigate the legal and commercial aspects of operating their business in Latin America. With deep knowledge of the industrial and natural resource sectors, we provide actionable and practical advice to help streamline our clients’ entries into Latin America, improve how they operate in the region, and to protect their interests.

Over the years, our team of legal and commercial advisors have developed a track record of working with companies of all sizes from Australia, Canada, the U.S., and Europe. The one common factor that connects our clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.

To better understand how we can support you in the Region, please contact Cody Mcfarlane at cmm@ax.legal