My Estonian company has a permanent establishment in the country where I live. What does this mean for tax purposes?

It is not necessarily a bad thing if your Estonian company has a registered PE (permanent establishment) in another state; it just means that your company has a taxable presence there. This is in fact quite common for businesses operating cross-border and with activities carried out in multiple locations. In practice, if a PE is created and has more material business activities, it is often registered in the form of a branch (filiaal in Estonian). For more information about a branch, contact your local legal adviser.

As mentioned above, separate registration, accounting and reporting obligations might arise when a PE is created.

The PE of the Estonian company will be taxed in accordance with the rules of the country where the PE is located and will be considered a “separate entity” for tax purposes. This means that the PE will pay taxes based on profits attributed to or earned by it. The income is normally determined by applying the arm’s length principle – a common concept in dealings between related parties to ensure that transfer prices reflect market terms.

Profit attribution rules are intricate and ever-evolving, so we will not go into too much detail. Usually a two-step analysis is needed to arrive at a fair amount of profit that a PE should generate. If you’re interested in how this works, generally accepted and followed guidelines are updated and published by the OECD. The main principle is that profit should be taxed where value is generated but also that the PE should be able to deduct taxable expenses necessary for earning the profit.