The Dutch Permanent Establishment

Core legal and tax principles for foreign businesses operating in the Netherlands

For foreign multinationals and internationally scaling businesses, the Netherlands has long functioned as a credible operating base for European activity. Its appeal lies not in aggressive tax outcomes, but in a system that combines legal certainty, administrative predictability and alignment with international standards.

That same alignment, however, means that businesses operating in or through the Netherlands must take the concept of a Permanent Establishment (PE) seriously. A Dutch PE is not a technicality: it is the point at which commercial presence in the Netherlands becomes taxable presence, with consequences across corporate income tax, VAT, payroll, and transparency regimes.

This article sets out the core principles governing Dutch permanent establishments. It is intentionally not written as a legislative update, but as a framework that helps decision-makers within businesses understand when a PE arises, what it implies, and how it should be managed.

Permanent establishment as a nexus concept

At its core, a permanent establishment answers a single question:

“At what point does the Netherlands obtain the right to tax business profits?”

Dutch treaty practice closely follows the OECD Model. A PE generally exists where a foreign enterprise carries on its business through a fixed place of business in the Netherlands. This includes branches, offices, factories, workshops, and other locations where business activities are actually performed.

The analysis is substance-based. Legal form, contract wording, or internal labels are rarely decisive on their own. What matters is whether there is a durable physical presence through which the enterprise’s activities are conducted.

Construction and project activities

Construction, installation, and assembly projects typically constitute a PE only once they exceed a defined duration threshold (commonly twelve months). The economic rationale is clear: short-term presence does not justify source-state taxation, while sustained project execution does.

From a risk perspective, the key issue is fragmentation. Where related parties divide work or contracts in a way that disguises what is commercially one project, the formal timeline becomes less relevant than the ‘overall activity’.

Preparatory and auxiliary activities

Certain activities—such as storage, display, or information gathering—may fall outside PE status when they are genuinely preparatory or auxiliary to the core business. However, modern PE doctrine is skeptical of artificial separation. If such activities form an essential and integrated part of the business model, the exception will not hold.

In practice: PE risk most often arises not from buildings, but from people—local teams who negotiate, decide, manage, or control commercially significant elements of the business.

PE versus subsidiary: presence without incorporation

The common misconception is that a permanent establishment is simply a “lighter” version of a local subsidiary. Conceptually, the two are very different.

A subsidiary is a separate legal person with its own balance sheet, governance, and corporate tax identity. A PE, by contrast, is not a legal entity at all. It is a taxable ‘slice’ of a foreign enterprise.

This distinction matters because:

• a PE does not shield the head office from legal or tax exposure;
• profits are attributed, not earned in law;
• compliance is functional rather than formal.

For many businesses, a PE is not a strategic choice but a natural by-product of growth—sales teams, project execution, technical staff, or logistics presence gradually crossing the nexus threshold. The real question is not whether a PE exists, but whether it is recognized, structured, and documented coherently.

A Dutch subsidiary or permanent establishment (PE)

A company that establishes a Dutch entity or creates a permanent establishment (PE) in the Netherlands becomes fully taxable in the Netherlands. This means:

• Dutch corporate income tax applies to profits attributable to the Dutch operation
• Transfer pricing and substance requirements become relevant
• Payroll tax, social security, and labor law obligations arise
• Full Dutch accounting and statutory reporting is required

This structure is appropriate when the Netherlands is intended to be a true operating center:
for manufacturing, R&D, regional management, or customer-facing commercial activity.

However, a legal presence is not required merely to import, hold, and distribute goods into the as you can read in this article.

Profit attribution: the PE as a “separate enterprise”

Once a Dutch PE exists, the next issue is attribution: how much profit belongs in the Netherlands?

The Netherlands applies the Authorized OECD Approach (AOA), under which a PE is treated as if it were a distinct and independent enterprise dealing at arm’s length with the rest of the group.

Functional and factual analysis

Attribution begins with identifying what the PE actually does. Assets, risks, and capital follow functions, and functions are defined by people.

In modern practice, the focus is on “significant people functions”:

• who makes pricing decisions;
• who controls inventory and credit risk;
• who manages customer relationships;
• who directs key operational and strategic choices.

A Dutch PE that executes tasks without controlling risk will generally earn a routine return. A PE that directs and manages entrepreneurial risk may justifiably earn more.

Internal dealings

The AOA allows recognition of internal dealings—services, financing, or notional use of assets—where these reflect economic reality and can be priced at arm’s length. This is often where theory meets friction: not all internal charges are equally accepted across treaties, and consistency is critical.

Capital attribution

A PE must be supported by an appropriate level of “free” capital to sustain its functions and risks. Capital allocation is not merely a balance-sheet exercise; it affects interest deductibility, return expectations, and the credibility of the overall attribution model.

Key insight: Profit attribution is rarely won on benchmarking alone. It is won by aligning the profit outcome with the actual operating model.

VAT: a separate ‘fixed establishment’ definition

VAT operates under its own definitions, side-by-side with the direct taxes such as CIT/PIT. As such, the existence of a corporate income tax PE does not automatically imply a VAT establishment, and vice versa.

A VAT fixed establishment requires sufficient permanence and the human and technical resources necessary to receive and use services for its own needs. This distinction is often overlooked—and can be costly.

VAT grouping and internal supplies

VAT complexity increases significantly where branches and head offices interact across borders and where VAT grouping is involved. In such cases, transactions that feel “internal” from a corporate perspective may be treated as taxable transactions for VAT purposes.

For businesses with mixed VAT recovery positions (e.g. financial services or holding activities), this can create real, non-recoverable VAT costs.

Employment, payroll, and economic employer concepts

A Dutch PE frequently triggers payroll obligations. From a tax perspective, employment income may be taxable in the Netherlands not only based on physical presence, but also based on economic attribution.

Under many tax treaties, employment income may be taxed in the Netherlands where:

• the employee is present for more than a defined number of days, or
• the remuneration is borne by a Dutch PE.

Even where formal thresholds are not met, Dutch practice recognizes an economic employer concept: where authority, supervision, and cost allocation point to the Netherlands, taxing rights may shift accordingly.

For internationally mobile talent, incentive regimes such as the 30% ruling can materially affect the cost of operating a PE. Conceptually, however, the key point is broader: talent deployment is part of PE design, not merely an HR issue.

Innovation incentives within a Dutch PE

A Dutch permanent establishment can, in principle, benefit from the Netherlands’ innovation stimulus framework where the relevant R&D activities, risks, and personnel are effectively located in the Netherlands. 

If development functions and decision-making authority over technology are attributable to the PE, profits connected to qualifying self-developed intangibles may fall within regimes such as the Innovation Box, while wage cost subsidies may be available through programs like the WBSO. 

The critical factor is alignment: incentives follow where innovation is genuinely performed and controlled, not merely where legal ownership is recorded. For multinational groups, this makes the functional profile of the PE decisive in determining whether innovation benefits can be accessed and sustained.

The end of a PE: exit taxation?

Exit taxation in the context of a Dutch permanent establishment is not triggered by legal form, but by the loss of Dutch taxing rights.

As long as assets, functions, and risks are attributable to a Dutch PE, the Netherlands accepts that taxation of value creation is deferred. When that attribution ends—because the PE is reduced, closed, or reorganized—the Netherlands is entitled to tax the unrealized gains that accrued while the PE existed.

What triggers exit taxation for a PE

In practice, exit taxation may arise where:

• Assets are transferred out of the PE, including machinery, inventory, or—most importantly—intangibles such as customer relationships or operational know-how;
• Functions or decision-making authority move, so that entrepreneurial risk is no longer borne by the Dutch PE;
• The PE is terminated or materially scaled back, resulting in a loss of profit-generating capacity in the Netherlands;
• Business activities are reorganized, even without formal transfers, in a way that shifts future income outside the Dutch tax base.

The decisive factor is not whether something is “sold,” but whether the Netherlands permanently loses the right to tax future returns linked to value created locally.

How the corporate exit tax operates

Exit tax treats the relevant assets or business components as if they were disposed of at fair market value at the moment Dutch taxing rights cease. This crystallizes gains that accrued during the period in which the PE was active.

Future value increases are not taxed in the Netherlands; only value attributable to the PE’s operating period is brought into charge.

Exit tax as a reflection of earlier choices

Where a PE’s functional profile, risk allocation, and profit attribution were coherent throughout its lifecycle, exit taxation is usually predictable and manageable. By contrast, disputes tend to arise where:

• the PE’s role was under-documented;
• decision-making authority shifted informally over time; or
• profit attribution never fully matched operational reality.

The takeaway: design is everything

A Dutch Permanent Establishment is neither inherently risky nor inherently efficient. Its success depends on whether it is designed consciously, aligned with the business reality, and maintained with discipline.

Well-run PE structures share three characteristics:

1. decision-making authority and profit attribution are aligned;
2. VAT and payroll consequences are integrated into the operating model;
3. documentation reflects reality rather than aspiration.

For businesses expanding into Europe, the Netherlands remains a strong and credible platform. But as with all stable jurisdictions, the advantage lies not in shortcuts, but in getting the fundamentals right.