Employing personnel through the PEO modality is highly beneficial in many aspects, but it is important to carefully assess case by case to avoid the risk of not managing the permanent establishment correctly.
Whenever a foreign company hires employees in Argentina through the PEO arrangement and its activity consists of exporting products from their headquarters to our country and the employees only perform activities related to commercial support, then there is no risk linked to having a de facto PE, since the in-country provision of services is going to be used abroad.
PEO service and de facto establishments not managed correctly
This is the case of locals hired through the PEO arrangement that, apart from providing commercial-support services, they provide local services – e.g. technical services, post-sale services, etc. – . That is to say, those cases in which they provide a service manufactured in Argentina. In that case, the foreign company would be considered to have a de facto establishment and should be taxed as a 3rd category subject in its capacity as a Capital Company, since in this case the “source” of income is no longer foreign or derived from imports, but of “Argentine source.”
If the company were to start operating as described above, it would have to pay income tax for the activities performed in Argentina, and the rest of branch offices/subsidiaries should pay an additional tax whenever they remit their profits to the headquarters. At the same time, the local employer of record should invoice the foreign company for the services provided to local clients and all the invoices would include VAT.
What’s more, we should bear in mind that the company would be double taxed when it comes to provincial and municipal taxes levied on income due to the fact that both companies (the EOR and the foreign client company) are subject to these taxes.
A solution to use the PEO arrangement while providing local services
In order to solve the risk of not having managed the permanent establishment correctly and avoiding tax multiplication, the local company can provide another line of business for foreign businesses: “a PEO service in combination with a complementary service of commercial representation.”
With this alternative, the local company would sign an agreement (representation, distribution, or similar) with the foreign end-client and would provide the services included in said agreement directly to local clients, since the employees are legally registered by the local company.
With this arrangement, there is no need for the provision of direct services by the foreign company to its local clients, nor the setting up of an in-country PE. Additionally, the tax duplication (provincial and municipal taxes), and all the corporate costs for the creation of the PE/foreign branch office are avoided.