Most foreign countries subject an external organization to its tax laws based on whether the external organization has created a Permanent Establishment (PE) in that country (i.e., a taxable presence). Typically, a PE is created when an organization is engaged in a certain level of activities within the foreign country and receives revenue for those activities from the foreign country. The threshold for determining whether the level of activities within a foreign country would create a PE is usually defined by the laws of the foreign country. Additionally, if there is an existing income tax treaty between the US and the foreign country, the tax treaty may also define what would constitute a PE.
Once a PE is created, there may be adverse income tax consequences, numerous foreign reporting requirements, as well as significant administrative costs associated with dealing with a foreign country’s tax laws. Depending on the foreign country, the implications of creating a PE could include having to legally register as an operating organization within the foreign country, requirements to engage a representative or local agent in the foreign country, and obligations to prepare income tax or corporate filings regularly. Failure to meet the foreign countries’ regulatory and tax law requirements puts MIT at financial and reputational risk and could jeopardize both the funding and the future of your program.