What is a permanent establishment?

The term ‘permanent establishment’ plays an important role for companies that operate in more than one canton, as it concerns the allocation of tax between cantons.

If a company has:

• its headquarters in a canton and
• additionally, a permanent establishment in another county

the profits and capital must be divided between the cantons involved. Each canton only taxes the share that is economically attributable to its tax jurisdiction.

The requirements for a permanent establishment are:

• Business premises must be available
• These business premises must be permanent, i.e. not temporary in nature.
• The company must conduct all or part of its business activities at these premises.

The tax consequences of a permanent establishment are particularly evident in the intercantonal allocation of profits and capital for tax purposes. This ensures that each canton only taxes the portion that is economically attributable to it, thereby avoiding intercantonal double taxation. Since cantonal tax rates vary, the allocation can also have a significant impact on the company’s overall tax burden.