Permanent Establishment in the Philippines: When a Foreign Company Is Taxable

A foreign company has a permanent establishment in the Philippines when it maintains a fixed place of business or a dependent agent here through which it carries on business. Under Philippine tax treaties, business profits are taxable in the Philippines only if the foreign enterprise has such a permanent establishment. The term itself is defined in the applicable tax treaty, not in the National Internal Revenue Code. Because each treaty has its own wording, the specific activities and duration thresholds must be checked against the treaty being invoked.

What a permanent establishment means

A permanent establishment is the treaty concept that gives the Philippines the right to tax the business profits of a foreign enterprise. Without one, the foreign enterprise's business profits are generally taxable only in its home country.

Philippine tax treaties follow the standard model: business profits of an enterprise of one contracting state are taxable in the other state only if the enterprise carries on business there through a permanent establishment. The definition of permanent establishment, and the list of activities that do not create one, appear in the treaty itself.

How a foreign company creates a permanent establishment

Treaties typically treat the following as creating a permanent establishment:

• A fixed place of business — a branch, office, factory, workshop, or place of management — through which the enterprise's business is wholly or partly carried on.
• A building site or construction or installation project, but only if it lasts beyond the period stated in the treaty.
• A dependent agent who habitually concludes contracts in the Philippines on behalf of the enterprise, or habitually maintains a stock of goods from which orders are filled.

Activities that are merely preparatory or auxiliary — such as storage, display, or delivery of goods, or purchasing goods — generally do not create a permanent establishment. The exact list and any time thresholds depend on the treaty invoked.

The role of the Securities and Exchange Commission registration

A foreign corporation doing business in the Philippines is generally required to obtain a license to transact business from the Securities and Exchange Commission. For tax treaty purposes, the Bureau of Internal Revenue requires proof of business presence: under Section 3(4) of Revenue Memorandum Order No. 72-2010, a corporation or partnership invoking a tax treaty must submit an original certification from the SEC stating whether the income earner is or is not registered to engage in business in the Philippines.

This certification matters because a foreign enterprise registered to do business locally is more likely to be treated as having a taxable presence, while one that is not registered may still be taxed if it otherwise has a permanent establishment under the treaty.

Claiming tax treaty relief with the BIR

If a foreign company wants its Philippine income taxed at treaty rates — or exempted because it has no permanent establishment — it must file a Tax Treaty Relief Application (TTRA) with the BIR's International Tax Affairs Division (ITAD).

Under Section 4 of RMO No. 72-2010, when the "Business Profits" article is invoked in relation to the "Permanent Establishment" article, the applicant must submit, together with BIR Form No. 0901-P:

1. An original or certified copy of the notarized contract.
2. A certified copy of the passport (whole booklet) of the concerned employee or employees of the income earner.
3. A notarized certification by the Philippine contractor as to the duration of the service to be performed in the Philippines for the entire duration of the contract.

These documents join the general requirements in Section 3, which include proof of residency, the articles of incorporation, a consularized special power of attorney where applicable, the SEC certification, and a certificate of no pending case.

Timing is strict. Under Section 14 of RMO No. 72-2010, the TTRA must be filed with ITAD before the transaction — meaning before the first taxable event, which is the first time the income payor is required to withhold tax. Failure to properly file within the prescribed period disqualifies the application. If documents are incomplete, ITAD issues a notice and the applicant has fifteen (15) working days from receipt to comply; otherwise the application is archived.

Frequently asked questions

Does a foreign company with no office in the Philippines still have a permanent establishment? Yes, it can. A dependent agent who habitually concludes contracts in the Philippines on the enterprise's behalf may create a permanent establishment even without a fixed office.

Is a foreign company with a permanent establishment taxed on all its income? No. Under the business profits article, the Philippines may tax only the profits attributable to the permanent establishment, not the enterprise's worldwide income.

What form is used to claim treaty relief for business profits? BIR Form No. 0901-P, filed with the International Tax Affairs Division under RMO No. 72-2010.

Practical takeaways

• A permanent establishment is defined by the applicable tax treaty, not by the Tax Code, so the specific treaty text controls.
• A fixed place of business, a long-running construction project, or a dependent agent can each create a permanent establishment.
• Merely preparatory or auxiliary activities generally do not.
• Treaty relief requires a TTRA on BIR Form No. 0901-P filed with ITAD before the first taxable event.
• The BIR requires an SEC certification on whether the foreign enterprise is registered to do business in the Philippines.

Primary sources

The rules discussed above are drawn from the following primary sources. Where the firm's library holds the document as a PDF it is embedded here in full; the rest are cited by title.

RR No. 16-2005 — Prescribes the Consolidated Value-Added Tax Regulations of 2005 superseding RR No. 14-2005 (Published in Manila Times on Oct. 21, 2005) Digest | Full TextOpen in Law LibraryDownload PDF

RMO No. 72-2010 — Prescribes the guidelines on the processing of Tax Treaty Relief Applications pursuant to existing Philippine Tax Treaties Digest | Full Text | Annex A | Annex B | Annex C | Annex D | FormsOpen in Law LibraryDownload PDF

• REPUBLIC ACT NO. 10963 - AN ACT AMENDING SECTIONS 5,6, 24,25, 27, 31, 32, 33, 34, 51, 52, 56, 57, 58, 74, 79, 84, 86, 90, 91, 97, 99, 100, 101, 106, 107,108,109,110,112,114,116,127,12S, 129, 145, 148,149,151,155,171,174,175,177,178,179,180, 181, 182, 183,186,188,189,190,191,192, 193,194,195, 196, 197,232, 236,237,249, 254, 264,269, AND 288; CREATING NEW SECTIONS 51-A, 148-A, 150-A, 150-B, 237-A, 264-A, 264-B, AND 265-A; AND REPEALING SECTIONS 35,62, AND 89; ALL UNDER REPUBLIC ACT NO. 8424, OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.