Using salary benchmarking to prevent permanent establishment risk


• Salary benchmarking helps demonstrate arm’s-length compensation, reducing the likelihood that overseas employees trigger permanent establishment (PE) risk for a business.
• Accurate benchmarking supports transfer pricing compliance, showing tax authorities that cross-border roles are remunerated in line with market standards.
• Combining salary benchmarking with clear employment structures and documentation strengthens a company’s defence during tax audits or regulatory reviews.

The possibility of triggering permanent establishment (PE) looms large for SMEs looking to try out new markets. Despite this, many businesses begin expansion projects without fully understanding what can trigger permanent establishment, or even what permanent establishment actually is.

When a business moves abroad - even if that only looks like hiring one worker or a storage arrangement - this can introduce complex tax risks. While hiring overseas or offering remote work options allows companies to access global talent, it brings with it the risk of creating a permanent establishment in that region.

But there is a way to prevent your company from inadvertently creating a permanent establishment, while continuing your presence abroad. Enter: salary benchmarking – one of the most important tools in any business leader’s toolkit.

So, let’s take a closer look at permanent establishment, and examine how companies can use salary benchmarking to prevent it.

What is permanent establishment?

Permanent establishment rules determine whether a business has a taxable presence in a foreign country. If tax authorities conclude that a company’s overseas employee activities amount to a permanent establishment, the business may face corporate tax liabilities, compliance obligations, and potential penalties in that jurisdiction.

For more information, read our article What is permanent establishment?

How easy is it to trigger permanent establishment?

Data shows that permanent establishment thresholds are often far lower than companies expect. Permanent establishment can arise in several situations, including when a company maintains an office or workplace in another country; when employees habitually conclude contracts on behalf of the business; and when business activities are carried out through a fixed location for a prolonged period

With the rise of remote work, the boundaries of what constitutes a permanent establishment have become more complex and differ greatly between countries.

For example, Thailand has a six-month threshold for service/construction PE. Meanwhile, in Germany, recent rulings mean that even the most minor physical presence, such as an airport locker, can constitute a fixed place of business and, therefore, trigger PE. And having a home office set-up in Denmark when your business is registered elsewhere is enough to create a permanent establishment there.

The role of salary benchmarking in international compliance

Salary benchmarking is an often-overlooked method mitigating these risks. By ensuring that cross-border employees are compensated competitively and in line with local standards, companies can strengthen their compliance position and demonstrate that their arrangements follow arm’s-length principles.

Salary benchmarking involves comparing employee compensation against reliable market data for similar roles within a specific location and industry. For internationally distributed teams, benchmarking provides valuable evidence that compensation arrangements align with local labour markets and tax expectations.

From a tax perspective, benchmarking supports the arm’s-length principle, which requires that transactions between related entities or business units reflect the conditions that would apply between independent parties.

If tax authorities review a company’s international operations, this documentation can help show that the business has appropriately allocated costs and responsibilities, reducing the risk that employee activity will be interpreted as evidence of a permanent establishment.

How benchmarking supports permanent establishment risk management

While salary benchmarking alone cannot eliminate permanent establishment risk, it plays an important role in supporting a company’s broader compliance strategy, demonstrating to authorities that the organisation is consciously committed to compliance.

Avoiding “fixed place” suspicions

If a company pays salaries that are inappropriate for the local market - either compensating far too highly or way below standard - this can draw unwanted attention from authorities and suspicions of the company having a “fixed place of business”, something that triggers PE.

Validating worker status

Benchmarking salaries to local standards allows organisations to provide that their remote workers are not part of a “fixed place of business”, but are instead temporary workers or part of auxiliary arrangements.

Accurate tax and payroll compliance

Salary benchmarking helps companies to be certain that they are operating in line with all local tax and payroll requirements, thereby preventing investigations by authorities into whether the company is tax compliant – the type of audits that can often lead to investigations into PE.

Supports the use of Employer of Record (EOR)

When using an Employer of Record (EOR) to hire overseas benchmarking helps define the correct compensation structure for the EOR to handle. This ensures the hiring company does not directly create a taxable presence in that country.

For more information, read our article Avoiding double taxation with global payroll solutions.

Building a strategic approach to permanent establishment risk

While salary benchmarking is a valuable tool, it should ideally be combined with other measures to effectively manage permanent establishment risk.

These may include establishing clear reporting lines and management structures; monitoring employee activity and travel patterns; and seeking professional tax advice when expanding into new markets.

Together, these measures amalgamate to form a strong framework that helps companies manage international tax exposure while maintaining operational flexibility.

As cross-border work continues to grow, businesses must carefully manage the tax implications of employing people in multiple jurisdictions. Permanent establishment risk remains a key concern for organisations with globally distributed teams.

How Mauve Group can help

Mauve Group’s Salary Benchmarking service is led by a team of experts with decades of experience and a wealth of local knowledge. Our team is ready and waiting to supply the solutions you need to avoid permanent establishment risk.

By supporting your company with salary benchmarking, our team can play a key role in ensuring that your employees are compensated in line with local market conditions, while remaining competitive. When combined with clear documentation, structured employment policies, and strong transfer pricing practices, benchmarking can help businesses strengthen their compliance position and reduce the likelihood of unexpected tax liabilities.

For organisations expanding internationally, incorporating salary benchmarking into global workforce planning is an increasingly important step toward sustainable and compliant global operations.

Contact our team today to find out more about our Salary Benchmarking service, Employer of Record solution, Global Payroll options, and more.

FAQs

What is permanent establishment risk?

Permanent establishment risk arises when a business’ activities in another country are considered substantial enough to create a taxable presence. This can trigger corporate tax obligations, reporting requirements, and potential penalties in that jurisdiction.

How does salary benchmarking help reduce permanent establishment risk?

Salary benchmarking provides evidence that employees are compensated in line with local market conditions and the value of their role. This supports the arm’s-length principle and helps demonstrate that employment structures are commercially reasonable.

Is salary benchmarking enough to prevent permanent establishment?

No. Salary benchmarking should be used alongside other measures such as clear role definitions, transfer pricing documentation, and structured global mobility policies. Together, these steps help organisations manage permanent establishment risk more effectively.