According to most of applicable corporation and value added tax laws, offices of foreign companies, aiming to supply commercial or technical assistance or productive activities in other countries, are subject to corporation and value added taxes, according to local taxation rates in each country, in or out of the European Community, apart from some exceptions in some countries.

Often companies controlling foreign legal entities might believe to avoid corporation taxes declaring that the activity in the foreign country is not falling under the concept of a ‘permanent establishment’, but this approach might imply a considerable risk, which might be emerging only after several years.

Hiding a technical or administrative assistance activity, also if simply to coordinate local dealers, is often considered by the tax authority as indirect assistance to the mother company marketing and commercial department, although no direct sales are taking place through the local country entity and no payment mean is collected, or commercial invoice issued locally.

In some countries, it is used the concept of ‘diffusion of information’ to help identifying a permanent establishment, while ‘collecting’ information activities (public relations, market or technical researches, business planning, buyer offices are often considered as acceptable activities for a representative/ liason office (R.O.), avoiding not only corporation and vat taxes obligations, but also accounting and balance sheet procedures (ex. Italy). In some other countries it is instead true that a representative/ liason office is avoiding corporation taxes obligations, but not accounting obligations which need anyway to be organized from the company (ex. India).

Other means of identification of a permanent establishment used from local tax offices are request of probationary documents of the kind of activity, or witness of employees and company local customers, with possible ‘crossed opinions’ to be signed after private interviews.

When these kind of inspections are taking place, it is not really easy to find a company which can be legally well defended, as daily fast evolutions and people turnover in companies are also not easy to keep under control.

The procedure of the tax authority in case of inspection and eventual claim is in most countries to simply estimate a taxable company profit (often not allowing a full cost deduction - and usually also estimating the turnover of the foreign company in the local country, between the date of registration of the R.O. and the date of the inspection), send a payment notice, and wait (usually 30/ 60 days) for the company to produce material of evidence of the opposite case within a short term from the receipt of the inspection notice.

Pure administrative penalties for the lack of proper bookkeeping, should be added in case of negative response of the inspection to penalties for the corporate tax avoided.

The registration of a Representative or Branch Office, is the simplest and cheapest way for a foreign Company to extend its presence abroad. The functions of a R.O. are although limited to information gathering, promotion, market and scientific research, public relations (no information diffusion, no technical assistance, no sales coordination, no marketing). In fact, it is not allowed to start with a R.O. any productive or commercial activity. This kind of entity is also often used in case of preliminary business planning activities. The activity of the representative office should be, at least in part, reflected in the employees’ job description in the employment contract, which cannot therefore include any mention to the items in brackets above, and possible should ‘not’ include reference to ‘variable salaries’ related to sales or other economic results, in order to be reasonably in line with the activity declared for the legal entity itself.

A R.O. is simply a "cost centre", it is not qualified to give rise to any kind of income.

For this reason it does not have any fiscal relevance and Vat / corporation taxes application and does not have any fiscal duty for the corporate and Vat tax return or bookkeeping/ accounting and balance sheet obligations.

A company tax code will anyway be opened for a R.O., useful to receive invoices from any supplier with application of V.A.T., which will be considered as a full cost. In some countries there is anyway a possibility to recover Vat, supplying original invoices copies, but this might not be advisable in some cases. This kind of request will often lead the Vat office to an inspection in which it might be checked heck in detail the kind of company activity, asking for any document or witness report.

In summary, should the Company produce any income in the local country of new registration, the local tax authorities could assess a permanent establishment, which would be subject to corporation taxes.

In case of missing payment of the fines, the C.E.O. or managing director, and anyway the person legally representing the company in the local country first and abroad later, is completely liable and the amounts could be recovered also through an international legal action.

There is no need of share/ quota capital in representative and branch offices.

2. If you choose to declare a ‘permanent establishment’, how can you organize cost and revenues transfers between mother company and foreign entity ? 

In case of registration/ existence of a branch office (B.O.) with permanent establishment, accounting and corporation taxes obligations, it is possible to use a so called ‘Cost Plus Agreement structure’, meaning the invoicing from the local branch office to the mother company of a periodical amount for service/ technical/ commercial activity in compliance with a ‘preliminary’ written agreement sent before the start of the billing activity by registered letter, and no direct invoicing to the local country customers directly from the branch office itself.

These agreements must be subject to local and international rules concerning ‘transfer pricing’, and depending on the content of the agreement there might be risks of applicability of corporation or Vat taxes anyway.

An alternative could be represented from a fund transfer simply to cover the local structure costs, under the title of loan, and then on fiscal year end, in addition to a formal act of renounce to the credit/ debit accumulated. Both the loan and the renounce to credit are advised to be in written and sent in advance by registered letter.

It is important therefore to organize in advance that each single wire transfer can be fully justified from these agreements, in order to avoid any possible tax office inspection risk.

3. Which are the administrative steps to proceed with a representative or branch office registration ?

• board resolution : this document must be original,signed at least from the company legal representative, notarized and depending on the country of origin, apostilled (example: not necessary for Belgium, France, Denmark, Ireland).
• This document should include at least :
• mother company headed paper (including legal address and company tax code/ enterprises registrar/ Chamber of Commerce company code, and contacts)
• name and qualification of the meeting chairman
• date and place of the resolution
• local entity name and kind (R.O. or B.O.)
• extensive name and surname and updated residence address of the mother company legal representative, nationality, place and date of birth, number and kind of identity document ; should these have already individual tax codes in the local country, this should also be added, or should they not, a local attorney should be nominated to proceed with such registration and a local fiscal domiciliation
• legal / administrative address of the local entity (it is advisable for this to chose an address which could be reasonably considered as permanent, as in some cases electing the employee home office address can be cheaper, but subject to higher risk of change, ex. In case of employment resolution during probationary period)
• declaration of the mother company and local entity activity
• name, individual data and powers of the local entity legal representative,
• possible attorneys for any action which any local representative might be

allowed to do on behalf of the mother company board (ex. registration of

remote banking, payments of salaries, social contributions, company and employees taxes, registration of local entity by any public office, signature

of employment / self employment contracts, relationships with suppliers or third parties etc.).

It is quite important for this document to be as much as possible all inclusive, if the company wishes to be operative in restricted timeframes, avoiding double administrative procedures and costs.

• identity documents of the mother company and local entity legal representatives, are in most of countries required to be recently authenticated by a foreign notary, and should be including updated residence address; should passports not be including this last information, an additional ‘official’ document including it would be necessary, as tax authorities mainly, need to have a sure local and foreign reference in case of fraud.

• mother company foreign certificate of registration: public office do always need to be sure that the mother company is a legal entity properly registered abroad. It is therefore necessary to enclose in the local entity registration procedure an original copy of the mother company registration certificate, which should state the updated name of the company, a registration number, the updated name of the legal representative and the company activity. In many countries, the certificate of registration is including simply a company name and code, and therefore for the two missing information in case it is very important to double check that these are included and notarized in the board resolution, as otherwise the lack of these official necessary information might stop and delay the procedure.

• legal translations : documents as from points A. and C. need to be legally translated from anybody who can be legally recognized in the country. This is subject to a service fee.

• Local notary deposit: documents above, are often required to be deposited by a local notary, before proceeding with registrations by local public offices. This is subject to a notary fee.

• B.O./ R.O. registration by local public offices : all the documents above will be copied several times in order to allow the local legal entity existence to be notified to all the necessary local offices (ex. Chamber of Commerce, tax offices, national insurance and national work accident insurance, integrative medical care, integrative pension funds, employment office etc.), in addition to local forms which should be properly filled in.

4. Which consequence in case of change of legal/ administrative address, change of local representative, change of mother company name and/or address, delegated powers etc. ?

Unfortunately in case of corporate changes, all authorities should always be informed through proper legal documents, therefore all the procedure above must be repeated. This is the reason why we always advise to forecast already in the first board resolution, the appointment of attorneys and addresses which could grant a reasonable duration of acceptance of the charge and domiciliation.

5. Given a choice of permanent establishment, which difference between a branch office and a limited liability company registered in compliance with country local legislation ?

** Please note that the formation by a sole shareholder would require the payment of all the share capital upon formation.