Permanent establishment: a key tax issue to be addressed in Switzerland and internationally

Definition of a permanent establishment  

The classification of a permanent establishment is based on three essential criteria:  

1. A place of business

This may be premises, an office, a workstation or even a co-working space openly made available to the company. It may also be a workshop, a point of sale or even a long-term construction site/project.

2. A fixed nature 

The place must have a certain permanence: an identifiable address, regular use and temporal stability.  

3. An activity carried out at this location 

The company must carry out all or part of its activity there, for example commercial, service, management or executive functions.  

On the other hand, a purely preparatory or auxiliary presence, such as limited marketing, representation or support activities, may not qualify as a permanent establishment depending on the specific circumstances.

High-risk situations 

Certain configurations present an increased risk of being classified as a permanent establishment:  

• Hub or satellite office in another county or country, with several employees, a dedicated lease and significant commercial activity.  
• Coworking space used regularly, on an almost permanent basis, with frequent presence of local employees.  
• Key manager or employee who habitually negotiates or concludes contracts for the company from another territory — including when working remotely.  

Even in the absence of a local legal entity (no subsidiary), the combination of "premises + staff + essential activity" may be sufficient to constitute a permanent establishment.  

Summary of the main tax risks  

Intercantonal concept  

In Switzerland, the recognition of a permanent establishment in another canton leads to a new distribution of profits and capital. As soon as a substantial technical or commercial activity is carried out there, several risks arise:  

• Multiple taxation points: opening an office in a new canton involves a breakdown of profits and capital, which may change the overall tax rate.  
• Discrepancies between cantons: a disputed permanent establishment classification can lead to economic inter-cantonal double taxation.  
• Impact on employees: depending on the canton concerned (and whether or not there are cross-border agreements), the withholding tax regime may vary significantly.  

To limit these risks, it is essential to anticipate the distribution of activities, define clear allocation keys (turnover, payroll, assets) and, for significant situations, secure the position through a tax agreement with the relevant cantonal tax authorities.  

International concept  

At the international level, the recognition of a permanent establishment leads to an immediate reclassification of the right to tax: according to the OECD Model, profits remain taxable in the State of residence, except for the portion attributable to the permanent establishment located abroad, which the source State may then tax.  

The main issues are as follows:  

• Taxation of profits and capital: the permanent establishment must have separate accounts or, failing that, a separate result allowing for allocation in accordance with the arm's length principle.  
• Risk of double taxation: differences between states on the scope or level of attributable profit may lead to residual double taxation despite the existence of a treaty.  
• Pillar 2: for the groups concerned, the presence of a permanent establishment may give rise to additional obligations, particularly in terms of minimum taxation and reporting.  
• International compliance: registration requirements, local tax returns, possible VAT registration and documentation of the profit allocation method.  
• HR/payroll impacts: possible effects on withholding tax, cross-border worker status, social security and the treatment of cross-border teleworking.  

Our recommendations  

Before opening an office, hub or co-working space in another county or abroad, or authorising remote working from abroad, it is advisable to:  

• Map out activities and responsibilities precisely: identify the places of work, the functions actually performed and the decision-making powers of the employees concerned.  
• Assess the risk of permanent establishment in relation to the OECD Model and internal rules, then define a clear policy for managing attendance and responsibilities.  
• Structure accounting and internal flows in such a way as to be able to justify the allocation of profits, expenses and resources between the various sites or entities involved.

We support your teams in analysing your organisation, identifying permanent establishment risks in Switzerland and internationally, and implementing appropriate security measures to ensure sustainable control of your tax risks.  

Article written by Murielle Kammermann and Lauren Mayoraz