Overseas Tax and Permanent Establishment
The most underestimated cost abroad is not the tax itself, but the years the authority claws back once a permanent establishment is found.
The real tax risk is that you are already operating there
Many companies assume tax begins with local incorporation. In fact tax starts earlier: a fixed place of business, or anyone habitually concluding contracts in your name, can create a permanent establishment (PE) — and the profits attributable to it are taxable locally.
AI companies carry two particular features. First, delivery is heavily remote: engineers in Shenzhen, customers in Frankfurt, little physical presence — yet service PE clauses in some treaties can still be triggered. Second, value concentrates in intangibles (algorithms, models, data), and transfer pricing of intangibles is exactly where tax authorities are currently most active.
What we do
- PE assessment: fixed place, agency and service PE boundaries, and the factual review behind them
- Transfer pricing: intra-group pricing policy, comparability analysis, local file and master file
- Intangible pricing: DEMPE functional analysis (development, enhancement, maintenance, protection, exploitation) to determine profit attribution
- Withholding tax and treaty relief: dividends, interest and royalties, beneficial ownership and treaty applications
- Indirect tax registration: EU VAT/OSS, UK VAT, Singapore GST, US state sales tax economic nexus
- Repatriation and anti-avoidance: CFC rules, foreign tax credit, economic substance requirements
Typical situations
Situation 1: Remote delivery found to create a service PE
The contract is signed by an overseas subsidiary, but the delivery team sits entirely in China and the project runs beyond twelve months. The destination authority relies on the service PE clause and claims local tax on part of the profit.
Our approach: quantify staff presence and project duration against treaty thresholds; restructure delivery (local delivery share, staff rotation); and assess historical exposure proactively.
Situation 2: Singapore holding company treated as PRC resident
The group holds IP through a Singapore company, but board resolutions, R&D decisions and contract approvals all happen in China, with only a registered address and nominee director locally. The authority treats the company as a PRC tax resident under the place-of-effective-management test.
Our approach: build genuine substance in Singapore (local directors, actual board meetings, decision records, local staff), or restructure IP ownership and profit allocation to avoid “shell entity, onshore decisions”.
Situation 3: Royalties paid without withholding
An overseas entity uses an algorithm model licensed by the Chinese company and pays a revenue share. The Chinese company invoices as a service fee and withholds nothing. Tax and late payment surcharges are assessed.
Our approach: distinguish technical services from royalties and classify by contract substance; review historical contracts and voluntarily correct mischaracterised items.
Process and deliverables
| Stage | Work | Deliverables |
|---|---|---|
| 1 | Business and people-flow review, PE risk identification | PE risk assessment report |
| 2 | Related-party transaction review and pricing policy | TP policy + comparability analysis |
| 3 | Documentation (local file / master file) | Contemporaneous documentation |
| 4 | Indirect tax registration and treaty applications | Registration certificates + treaty relief applications |
| Ongoing | Repatriation planning, audit defence | Repatriation options + audit response plan |
Frequently asked
Can we be taxed without a local company? Yes. PE rules target exactly this: substance without a legal entity. Whether one exists depends on premises, personnel, contracting authority and duration.
Is transfer pricing documentation mandatory? Companies meeting size or related-party transaction thresholds must prepare it. Even below thresholds, the absence of pricing evidence creates exposure in an audit.
Can a Hong Kong or Singapore company enjoy low tax? It depends on substance and local rules. Hong Kong’s offshore claim requires proof profits did not arise there; Singapore has no general offshore exemption, and both regimes are tightening substance requirements. Registering in a low-tax jurisdiction is no longer sufficient on its own.
How can profits be repatriated compliantly? Common routes are dividends, service fees and royalties. Each carries different tax and compliance consequences and must be designed together with treaty relief, withholding and foreign exchange rules.
Legal basis
- Enterprise Income Tax Law and implementing regulations, including CFC rules
- China’s double tax treaties (permanent establishment and royalty articles)
- OECD Transfer Pricing Guidelines and BEPS Actions 8-10 (DEMPE framework)
- EU VAT Directive and OSS/IOSS rules
- Singapore Income Tax Act; Hong Kong Inland Revenue Ordinance; local economic substance requirements