When a local alternative makes sense

The discussion up until this point is used to inform the reader on the many tax issues that can have an impact on an IT consulting firm.  However, it approaches the issue from a tax perspective which may or may not be in line with a business necessity.  In some instances, it might actually make sense to have a local presence in the market.  Dealing with international tax issues is a nightmare for most people, but what if you took the international part out of it?

The main point is that by having a local presence, you will get flexibility.  In the examples mentioned above, a simple decision to send an employee with too much latitude to contractually bind the firm can create a permanent establishment.  Other questions, such as what is an “auxiliary” nature and what constitutes a “fixed place of business” can be equally arbitrary and often vary between the jurisdictions involved.  The one point in which there does seem to be consensus around the world is that once you create a permanent establishment, the country in which it is located will either exclusively (or in conjunction with your actual state of residence) have the power to tax all income allocated to that establishment.

Reduce Withholding Tax


The real fear of a permanent establishment is when you haven’t actually planned for it.  However, with proper planning and understanding of the consequences, you can create a local presence without needing to worry.  A subsidiary, by definition, is a separate legal entity that is wholly-owned by the parent company.  The establishment of a subsidiary would create a local tax obligation, but any fees and costs that are spent (e.g. payroll, administrative, etc.) can be deducted.  Furthermore, a subsidiary would remit profits back to the parent by declaring a dividend.  In many jurisdictions a dividend will create a WHT obligation, but the use of a DTT or converting a dividend into interest can potentially eliminate this tax.  Furthermore, any tax paid on a dividend in one country will normally be creditable against the tax liability of another country.

The other option is creating a local branch as an extension of the home office.  Again, a branch will create a permanent establishment and any expenses can be deducted against income to reduce local taxes.  It should be noted that in particular the UK and US, a branch remittance tax (or branch profits tax, in the case of the US) may be applicable on the amount that, had the branch been a subsidiary, would be required to be withheld from the dividend. 

While neither of these options would be recommended for short-term projects, the ability to plan in advance and combine services with local companies provides control and stability for longer-term engagements.


A great alternative to setting up a business in each location is outsourcing the local presence to a Professional Employer Organization (“PEO”). You can use a local PEO or outsourced employer to run your employees. They can run payroll, ensure tax and employment compliance and deal with immigration concerns to get your staff onsite. This is particularly attractive for shorter projects or where you want to minimize the administrative burden on your firm.

Considering the concepts mentioned above, the risk of being classified as a permanent establishment is high when using your own employees.  The consequences, in terms of tax, are even worse.  By using a local firm to run payroll and deal with compliance you can reduce the risk of being classified permanent establishment. Additionally if you run billing through a local entity that also runs the local payroll the WHT amount can be reduced.   You can reduce your taxable income in the country by deducting local expenses; only the total fees less the payroll fees will be subject to WHT.  For businesses like recruitment companies or consulting firms where the cost of contractors makes up a large percentage of the total billing, this can be a significant savings.

Improve Worldwide Profits

You can also blend these approaches by setting up a local subsidiary or branch which primarily deals with financial administration with your client, but have your employees work through a local provider.  Whereas the administrative burden will be higher and you will be responsible for the statutory reporting of a local company, you will retain the control of the invoicing relationship with the client and send payroll funds to a local provider without being subject to WHT.  Moreover, only the profit remitted back to the parent company will be subject to WHT while providing you with a great deal of flexibility and security. 

About the author: Christian Wunderley, LL.M. is an international tax consultant and Managing Partner of the U.S tax firm, CD Tax Associates.  He has a number of years of experience working in both financial services and international tax, including firms such as PricewaterhouseCoopers, BDO, and Citigroup.  His specializations include withholding tax, particularly for non-U.S. businesses and investors that want to invest in the United States.