Permanent Establishment VS Source of Income (Important Distinction for Tax Planning)

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The terms that we'll be discussing today are causing lots of confusion in the offshore structuring world.
People often mix them, and when it comes to tax planning it is VERY important to use correct terms and to understand what do they mean.

Today we are talking about the difference between Permanent Establishment and Source of Income.

Before we discuss these terms let's go back to basis.
You are taxable based on 3 factors:
1. Where is company based, residency of the company
2. Where are shareholders, residency of the person
3. Where is income, residency of the income

Now we can talk about source of income. You can have a foreign company, with the foreign owner, but if the income is locally sourced (locally resident), that income will be taxable locally.
People often mistake source of income for permanent establishments. They often say that you can't have permanent establishment somewhere, otherwise you're taxable.
It is not neccessarily correct.

Different countries will have different rules around permanent establishments and source (residency) of the income. You will need to understand how every country you're dealing with sees local source income and permanent establishments.

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