In taxation, a permanent establishment (PE) is a fixed place of business through which a business carries out its activities, either wholly or partially. The concept of permanent establishment is important for determining the tax liability of a business in a foreign country.
When a company operates in a foreign country through a permanent establishment, it becomes liable to pay taxes on its income generated in that country. The tax liability will depend on the tax laws of the host country and any relevant tax treaties between the home country and the host country.
Typically, a permanent establishment is created if a company has a physical presence in a foreign country for a certain period of time or if it has employees who carry out business activities on its behalf in the host country. Examples of permanent establishments include offices, factories, workshops, and warehouses.
In order to avoid double taxation, many countries have entered into tax treaties that provide guidelines for determining when a company has a permanent establishment in a foreign country and how the income generated from the permanent establishment should be taxed. These treaties also outline the procedures for resolving any disputes that may arise regarding the interpretation or application of the treaty.
The Indonesian term for Permanent Establishment (PE) is “Bentuk Usaha Tetap” (BUT)
A Permanent Establishment (PE) is a fixed place of business through which a company carries out its business activities, either wholly or partially, in a foreign country. The term “Bentuk Usaha Tetap” refers to the legal and structural form of this type of business presence.
In Indonesia, the following are considered as Bentuk Usaha Tetap (PE):
- Office, branch or other place of business
- Factory, workshop, warehouse or other place of production or storage
- Mine, oil well, quarry, or other place of extraction of natural resources
- Building site, construction, assembly, or installation project or supervisory activities connected therewith where such site, project or activities continue for a period of more than 6 months.
When a company has a Bentuk Usaha Tetap in Indonesia, it is liable to pay taxes on the income generated in Indonesia in accordance with Indonesian tax laws and regulations. In order to avoid double taxation, Indonesia has also entered into tax treaties with many other countries that provide guidelines for determining when a company has a Bentuk Usaha Tetap in Indonesia and how the income generated from it should be taxed.
Also Read : Introduction of Tax Treaty