I heard that the representative office has a risk of PE accreditation. Specifically, what kind of risk is it?
★ Explanation ★
PE stands for Permanent Establishment and in Japanese is called 「恒久的施設」(kōkyū-teki shisetsu).
A Permanent Establishment is a certain place where the business is conducted, and taxation is based on whether or not the operation has a permanent establishment in Japan.
In other words, if you do not have a permanent establishment in Japan, you will not be subject to corporate tax. Conversely, if it exists or is deemed to exist in Japan, corporate tax will be imposed.
As described above, permanent establishments are the basis for taxation on foreign corporations, and one of the concepts of international taxation states that “there is no tax if not a PE”.
The representative office is not expected to conduct business directly. It is generally accepted that foreign corporations that only carry out preparatory and supplementary duties such as information gathering, market research, advertisement, and purchase and storage of goods are not recognized as PE that conducts direct business activities, thus no tax liability is imposed.
However, when the representative office is not limited to preparatory and supplementary work such as information gathering, market research, advertisement, etc., but is an important part of sales activities such as the conclusion of contracts; once recognized as a PE that conducts direct business operations, there is a risk that it will be taxed in Japan.