The Invisible U.S. Tax Risk: Permanent Establishment (PE)
A single office or employee can lead to unexpected U.S. tax burdens. This guide helps you diagnose the risk of your U.S. activities being deemed a 'Permanent Establishment' and build a tax-efficient operational strategy.
Interactive Diagnosis
Permanent Establishment (PE) Risk Self-Assessment
Answer the questions below to see your company's potential PE risk level in real-time.
Diagnosis Result: Overall Risk Level
Please start answering the questions.
Core Concepts
Why PE Matters: The Tax Treaty Shield
U.S. tax law is broad, but the U.S.-Korea Tax Treaty provides powerful protection, stating that no tax is due unless you have a 'Permanent Establishment'.
U.S. Domestic Law: The USTB Standard
A low-threshold standard where "considerable, continuous, and regular" activity can be deemed a "U.S. Trade or Business" (USTB) and thus subject to tax.
Result: ECI Tax + Branch Profits Tax
All "Effectively Connected Income" (ECI) is taxed at 21%, followed by an additional 30% Branch Profits Tax on repatriated earnings, leading to a very high tax burden.
U.S.-Korea Tax Treaty: The PE Standard
A high-threshold standard requiring a "fixed place of business" or a "dependent agent" with authority to conclude contracts before U.S. tax can be imposed.
Benefit: Limited Taxation
Only income attributable to the PE is taxed at 21%. No Branch Profits Tax applies. If there is no PE, business profits are exempt from U.S. tax.
Strategic Solutions
PE Risk Avoidance and Management
You can utilize treaty exceptions and strategically structure your corporation to minimize PE risk.
The U.S.-Korea Tax Treaty explicitly excludes certain "preparatory or auxiliary" activities from the definition of a PE. Leveraging these allows you to perform specific functions in the U.S. without triggering tax.
Storage, Display, Delivery
- ✓ Do: Keep bulk inventory in a third-party logistics (3PL) warehouse.
- ✗ Don't: Operate a fulfillment center that processes and ships individual customer orders.
Information Gathering & Purchasing
- ✓ Do: Run a liaison office for market research or identifying potential suppliers.
- ✗ Don't: Negotiate or conclude sales contracts with customers from that office.
Advertising & Other Preparatory Acts
- ✓ Do: Pure advertising for brand awareness; preliminary research.
- ✗ Don't: Have advertising activities that directly lead to sales orders.
Dispute Resolution
Securing Tax Certainty & Resolving Disputes
Effective mechanisms exist to proactively prevent future tax disputes and resolve double taxation.
Advance Pricing Agreement (APA)
The most powerful tool for gaining tax certainty by proactively agreeing with tax authorities on a transfer pricing methodology for future related-party transactions. It prevents audits and disputes before they start.
- Bilateral/Multilateral APA: Involves both the U.S. and Korean IRS, completely preventing double taxation. Time and resource-intensive.
- Unilateral APA: An agreement with the U.S. IRS only. Faster process, but risk of adjustment in Korea remains.
Mutual Agreement Procedure (MAP): A government-to-government process to resolve instances of double taxation that have already occurred.
Median APA Processing Time (as of 2022)