What to Verify Before Approving Foreign Remote Work and Why It Is Crucial for Companies
Remote work and relocation are now routine management tools. Employees often move abroad while remaining employed in Israel. This sometimes occurs without the company establishing a local presence. Meanwhile, tax authorities are asking a key question. Does an employee’s foreign activity create a taxable “business presence”?
This introduces the key term: Permanent Establishment (PE). PE determination can create registration and reporting duties. It may also lead to profit attribution and local taxes. This applies even when management and finances stay in Israel.
This article does not aim to discourage relocation. Its purpose is to clarify the rules in advance. It helps manage risks in a transparent and orderly way.
This article will detail what to do before approving the relocation. In summary:
- Map the employee’s role and verify the extent of customer-facing activities and commercial authority.
- Examine the destination, duration, and any relevant tax treaty.
- Define rules for negotiations, signature marketing representations, and documentation.
- Check for associated risks like payroll, VAT, and immigration.
What is a Permanent Establishment and How Can Remote Work Create One
A Permanent Establishment (PE) is a test from tax treaties. It determines when a foreign country can tax a company’s profits. This happens if the company has sufficient business activity there (See the OECD Model Tax Convention definition).
In practice, a PE can be created in several forms:
- A fixed place of business: An office or a permanent workspace. In some cases, this also includes a location from which business activities are conducted on a consistent basis.
- A dependent agent: A person acting on the company’s behalf. This includes leading to binding contracts or substantive negotiations.
- Substantive activity: Essential business operations conducted locally. This can occur even without a formal office.
*Note to readers: A note to our readers: There is no single rule applicable to all countries. The outcome is determined by local law, the relevant treaty (if one exists), and the facts on the ground. Therefore, the correct question is not merely “Is the employee permitted to move?”, but rather “How does this appear from the perspective of the tax authority in the destination country?”
When Remote Work Becomes Foreign Business Activity
Tax authorities examine two dimensions: how long and what the employee does.
- How many workdays abroad elevate the risk of a Permanent Establishment?
The more that work from a foreign country becomes a regular pattern (rather than a short-term exception), the higher the probability that the tax authority will view it as ongoing activity. As there is no uniform time threshold across all countries, and in some cases, determination depends on local facts and enforcement, it is best not to rely on a single number of days as an ironclad rule. In practice, the operative question is whether a business routine has been established from the destination country.
- Does a sales or business development role create a dependent agent?
This constitutes one of the most prominent risk areas for a PE in relocation scenarios. A relocated employee performing functions such as identifying customers in the destination country or region, holding regular sales meetings, conducting substantive commercial negotiations, or advancing a deal to the “almost signed” stage, may be perceived as generating local activity for the company. This holds true even if the formal execution of the contract occurs in Israel. The more the employee is perceived in the field as the face of the company to customers, the greater the risk becomes.
What Red Flags Attract an Auditor’s Attention
The issue is rarely the relocation itself. It is the combination of a sensitive role with unclear limits. A lack of proper documentation also increases risk. Examples of red flags:
- Regular contact with local customers for meetings or support.
- Using a local address on websites, business cards, or emails.
- A local phone number suggesting a “branch” presence.
- Practical authority to set prices or material contract terms.
- Recruiting local employees or managing local suppliers.
- Operational management of projects from the foreign country.
We have prepared a table to summarize common pitfalls and their solutions:
Red Flag | Why It Increases Risk | Practical Solution (Policy and Documentation) |
Employee conducts substantive negotiations | May be seen as a dependent agent concluding deals. | A policy should define who conducts negotiations. It must clarify who approves material terms. All stages should be documented in writing. |
Use of local contact details in publications | May create the appearance of a “place of business.” | Prohibit using local contact details for company purposes. Update all signatures and marketing materials accordingly. |
Frequent client meetings in the country | Shows consistent local business activity. | Set rules for meetings. Ensure an Israeli representative is present. Maintain detailed CRM documentation. |
Recruiting employees / Managing local suppliers | May indicate local operational activity. | An approval process, delineation of authorities, and documented decision protocols. |
Long-term, continuous work from the destination country | May be perceived as a business routine. | Track all days of stay. Define a clear time period. Periodically review the associated risk. |
What Documents Are Important to Reduce PE Exposure
During an audit, disputes are resolved by facts and documents. We advise preparing a comprehensive relocation file in advance. This file should include:
- Employment Agreement or Relocation Addendum: Specifies duration, location, at whose initiative the relocation occurs, and the overall framework.
- Job Description and Authorities: Defines what is permitted, what is prohibited, and who approves exceptions.
- Corporate Remote Work from Abroad Policy: Establishes clear boundaries for negotiation and signing authority.
- Signing and Contracting Procedures: Outlines who signs contracts and where the final commercial decision is made.
- Activity Trail: Includes meeting calendars, conference attendance, client visits, and CRM documentation.
- As needed: Transfer Pricing Documentation: Required to justify the attribution of profits between countries.
The key is consistency. The policy must not only be on paper but also be implemented in practice
What is the Actual Exposure if a Permanent Establishment is Determined in a Foreign Country
When a country determines that an Israeli company has a Permanent Establishment within its territory, it typically initiates a standard package of requirements:
Local Tax Registration and Reporting
- Opening a file with the local tax authority.
- Filing periodic and annual tax reports, and in some cases, local bookkeeping requirements.
Profit Attribution and Local Taxation
Tax is not on the group’s entire income. It is on profits attributable to the local activity. Profit attribution is a complex field. It often intersects with transfer pricing rules. It requires analyzing local functions, risks, and assets.
Penalties, Interest, and Assessment Proceedings
If reporting was delayed, exposure may include interest and penalties. This could lead to tax assessment disputes requiring professional management.
Ancillary Risks in Relocation
Even without a PE, relocation can create other risks:
Payroll and Withholding Tax
The destination country may have payroll or withholding tax obligations. This depends on local law and the duration of stay.
National Insurance/Social Security
Relocation raises questions about insurance and social security liability. Bilateral agreements between countries may apply.
VAT and International Services
In certain circumstances, contingent upon the laws of the destination country and the nature of the service (e.g., digital services), obligations related to VAT or other indirect taxes may arise. These obligations can include requirements for registration and reporting.
Immigration and Labor Law Aspects
“Remote” employment does not exempt a company from its obligation to comply with local regulations. This includes, work visas, employee rights, and local employment laws that may be applicable depending on the circumstances.
Example: An Israeli Startup with a Sales Manager in Cyprus
An Israeli startup sells its product in Europe. The company approves a sales manager’s request to work from Cyprus for a year. In practice, he:
- Holds frequent sales meetings with European customers.
- Negotiates commercial terms.
- Advances deals to a late stage.
Under such circumstances, the destination country may contend that the company is conducting local business activities through the employee, and consequently, that a Permanent Establishment has been created via the relocation. The implications could include registration and reporting requirements, as well as a formal discussion regarding the attribution of profits to the activities actually performed from abroad.
A Brief Exposure Check Before Relocation
In conclusion, relocation is a business decision, and as such, it must also be a sound tax decision. An Israeli company can legitimately permit remote work from abroad. However, it is advisable to do so while proactively managing the associated risks: understanding the employee’s actual functions, defining the limits of their authority, and establishing robust documentation and policies. This approach preserves operational flexibility without creating unplanned tax liabilities in other countries.
If you are considering approving a relocation or remote work from a foreign country, a focused exposure assessment is recommended. This should cover: the destination country, duration of stay, the employee’s role and authorities, customer-facing activities, and reporting and payroll procedures. At Nimrod Yaron & Co., we assist companies with Israeli and international tax planning, managing Permanent Establishment risks, and addressing the ancillary aspects as required.
FAQ
What is a Permanent Establishment in relocation?
A foreign country’s claim to tax a company’s local profits. This is based on sufficient business activity in that country.
Does working from home exclusively create a PE?
Sometimes, if the activity is regular, substantive, and serves the company’s business.
What role is most sensitive for creating a Permanent Establishment?
Typically, roles in sales, business development, and customer management are the most sensitive, especially when they involve contact with customers in the destination country.
What is the company's exposure if a Permanent Establishment is determined?
The exposure includes local registration and reporting, profit attribution, taxation in the destination country, and potentially penalties and interest.
When is it advisable to seek professional counsel?
It is advisable to seek counsel prior to approving the relocation, or as soon as the employee begins to engage in activities with customers in the destination country.
