International projects or programs are subject to the laws and regulations of the foreign country where the activity takes place, in addition to applicable U.S. federal and state laws, and projects or programs operating outside the U.S. may trigger a “Permanent Establishment” in the foreign country. The purpose of this guidance is to provide an overview of “Permanent Establishment” and related tax and legal obligations in other countries.

Permanent Establishment

The concept of “Permanent Establishment” generally arises from tax law. When an organization like the University engages in certain levels of activities in a foreign country, a Permanent Establishment may exist or be triggered, causing the institution to be subject to various legal responsibilities in the foreign location. Ultimately, U.S. tax treaties (between the U.S. and the foreign country) or the laws of the foreign country (absent a tax treaty) govern location-specific definitions of “Permanent Establishment.” The following list of activities may trigger a Permanent Establishment in a foreign location:

• Leasing or owning office space, a lab, or other real property in the foreign country.
• Sending University employees previously located in the U.S. as expatriates to the foreign country for extended periods (usually more than six months per year) or hiring local or third-country nationals as University employees.
• Hiring independent contractors in the foreign country.
• Opening University bank accounts in the foreign country.
• Generating income or revenue through operations in the foreign country.
• Providing educational services or teaching University courses outside of the U.S.
• Conducting research activity through a fixed place of operation (e.g. offices).
• Conducting regular or continuous activity in the country over a long-term period.

The University’s non-profit status in the U.S. does not apply to creation, or not, of a Permanent Establishment based on the University’s activities in the foreign country. Although the University operates as a non-profit in the U.S. for tax purposes, the laws of the foreign country will dictate whether the University’s activities in the country can be treated in a tax-exempt manner.

When a locale deems that the University has a Permanent Establishment in the country, the University must address its legal (and tax) presence and will be subject to significant obligations in this locale. These include payment of required local taxes and administrative costs in order to comply with local tax and legal requirements. For these reasons, the University strives to arrange its activities to avoid Permanent Establishment issues. If the University fails to take necessary steps to address a Permanent Establishment in a country, it and affiliated researchers, faculty, and/or students could also suffer serious adverse consequences. While these consequences are beyond the scope this guidance, such a failure could jeopardize the ability of a particular project to continue and could significantly harm the reputation of the University, its faculty, staff, and students operating in the location.

Determining whether a University project or program rises to the level of a Permanent Establishment may require the advice of external legal and/or tax experts. It is important to remember that no two counties are the same, and acceptable activity in one locale may not be acceptable in another. For activities that could give rise to a Permanent Establishment, Global Engagement, the Office of Counsel, and University Finance must be consulted in the earliest stages of planning as possible to assess Permanent Establishment issues.

Registration and Entity Formation

In foreign countries where the University’s activities give rise to Permanent Establishment, the University may need to form a legal presence in the country. This could include registration of the University with the foreign government and/or the creation of a new subsidiary or entity affiliated with the University that is formed under the local country’s laws. Establishing a formal legal presence in another country requires advanced consultation with external legal experts, and such a presence would bring ongoing administrative costs and compliance obligations that the program or project must support. Any decision to register the University or form a legal entity in a foreign country must be made by senior University leadership, including the President and General Counsel, and must involve input by the Office for Global Engagement. Among other things, University leadership will take into account the long-term strategy of the specific program and other University activities in the country.

Options and Solutions

The University utilizes several options for conducting projects outside of the U.S.:

• Partner with Local Collaborator – Partnering with a local organization to help fulfill project goals is often the best option to achieve project goals while avoiding Permanent Establishment issues. Local organizations can be included as subrecipients [link to Subaward guidance] in sponsored project proposals. If the project is awarded, the University can issue a subaward to the local organization. Outside of sponsored projects, the University may be able to partner with a local organization through an MOU or other contract arrangement. Local partners may be able to perform tasks locally that the University is prohibited from doing or which may present significant risk if it does. These may include employing local employees, U.S. expats or third country nationals; providing local financial and banking support to a project; assisting with procurement needs; or performing other work that requires specific licensing or authorization. The local partner may also be able to help solve space needs.
• Contracts with Service Providers –Global Engagement’s guidance regarding Contracts for Services, Research, and Goods in International Research Projects [Link] summarizes how the University may enter into contracts with local service providers to support projects. These arrangements could include providing “on the ground” support or local coordination of a project. Departments and researchers are encouraged to use local service providers as means to avoid permanent establishment compliance issues.
• Modify Activities – If a local partner is not available, or contracting with service providers does not suit project needs, the project activities may require modification to avoid risks and compliance issues relating to Permanent Establishment.

Contact

For more information on Permanent Establishment issues and steps that researchers can take to avoid Permanent Establishment concerns, researchers and departments should contact Global Engagement.