What is permanent establishment?

Key takeaways

• What permanent establishment is: Permanent establishment (PE) is when you trigger a local taxable presence by crossing a country's activity or time thresholds. Specific thresholds vary by country.

• How permanent establishment works: You can trigger PE by having a fixed business location, working with a dependent agent, or having sufficient online revenue or customer base in the market.

• How to determine permanent establishment: Permanent establishment, for tax purposes, is based on the host country's rules and thresholds. Tax treaties raise or lower those thresholds.

• How to manage permanent establishment risks: Map your people, activities, and revenue against local PE rules and relevant tax treaties. An employer of record (EOR) like G-P can simplify global hiring and minimize exposure.

Permanent establishment (PE) marks the moment your business activities become subject to corporate income taxes in another country. Each country sets its own rules, so when you’re operating across borders, knowing what activities and time thresholds trigger PE is your safeguard against unexpected tax obligations. 

Here are a few PE essentials to keep in mind.

What is permanent establishment?

Permanent establishment is a tax concept used to determine when your business activities are significant enough for you to be considered a local taxpayer in another country. Once you cross a certain threshold of “permanence” or “substance,” you have to pay corporate income taxes.

Every country has its own activity and time thresholds, but most PE definitions derive from local legislation or tax treaties. Once a PE is created, the host country has the right to tax profits that stem from local operations. 

PE status has many compliance requirements, including filing annual corporate income tax returns. Additionally, your company may face VAT/GST obligations and payroll and employment tax considerations, such as withholding taxes for local staff and contributing to national social security programs.

How tax treaties impact PE

Tax treaties are bilateral agreements designed to prevent double taxation. When creating PE rules, tax treaties refer to two models:

• 1) Model Tax Convention on Income and on Capital (OECD model)

• 2) Model Double Taxation Convention Between Developed and Developing Countries (UN model)

These treaties explain what types of income are taxed in different countries and how to avoid taxing the same income twice. While the frameworks are guidelines, the tax treaties themselves are legally binding agreements.

How does permanent establishment work?

Once you trigger PE, the local government may tax your profits within the country. Typically, net income is taxed, not total revenue. Failing to comply with tax obligations can cause legal issues and penalties.

PE triggers vary per country. Examples include:

• Partially or wholly operating your business through a fixed establishment

• Working with agents who negotiate deals or sell products on your behalf

• Offering digital services with a significant number of users and revenue 

An agent is an individual, subsidiary company, or another independent company that performs business activities that benefit your company. A dependent agent acts on behalf of your company and relies on it for most of their income. They often have the authority to conclude contracts. An independent agent is self-employed and represents multiple clients. 

In the U.K., an agent acting on your company's behalf who regularly concludes contracts can trigger PE.

Having a physical business location can trigger PE. If you meet these requirements, you likely have a fixed place of business:

• Your business has a specific physical location (like an office) in the country.

• Your employees regularly conduct core business activities at this location.

• This place of business is used for business activities on an ongoing basis.

Some countries set PE thresholds based on how long you operate there. For example, the tax treaty between Thailand and the U.S. has a 90-day threshold for consultancy services and a 120-day threshold for construction projects.

Permanent establishment exemptions

PE also has exemptions. For instance, Denmark and Switzerland's tax treaty exempts facilities used for storing and delivering goods.

The OECD and UN models outline other exemptions, including:

• Facilities that display, store, and deliver goods or merchandise

• Maintenance of stocks in storage facilities

• Maintenance of stocks for processing

• Maintenance of a fixed place of business used for purchasing goods or collecting information on behalf of a company

• Maintenance of a fixed place of business for other purposes

How to determine permanent establishment

Permanent establishment rules depend on the country. These benchmarks can help you determine your risk:

• Regular workplace: Do your employees work at a specific physical location regularly? This shows the business activity is consistent and ongoing.

• Significant income: Do your business activities generate a notable amount of money in the country? Many countries have specific revenue amounts that trigger PE, including income from online sales and services.

• Contract power: Do agents have the power to sign contracts for your company? Even without a physical office, agents who can make deals on your behalf can trigger PE.

Working with an employer of record (EOR) mitigates PE risks. An EOR serves as the legal employer for your international workers, handling tasks such as payroll, local tax withholding, and labor law compliance.

Having a local legal entity and a registered payroll are common triggers for tax audits. You can bypass this by partnering with an EOR. Hire globally with ease while allowing your internal teams to focus on managing corporate tax compliance and broader PE risks.

Types of permanent establishment and examples

PE can take different forms, depending on the business activity.

1. Physical permanent establishment

Having a physical location in another country is a common permanent establishment example. A fixed place of business suggests a sustained and significant presence in the country. Qualifying physical locations include:

• Offices

• Workshops

• Factories

• Construction or installation projects

• Places of extraction for natural resources

Remote work introduced an important PE question: Does a home office constitute a fixed place of business? In the past, tax authorities looked at this through a contractual lens. But the OECD’s 2025 update clarified that a home office used by an employee doesn’t automatically create PE.

Now, the OECD takes a more commercial view: PE can be triggered if the employer uses the home location as an official company site and/or the employee's work drives local sales or market creation. The company must be intentionally doing business in that market rather than simply having someone working remotely from that location. Think of it as the difference between where business happens vs. where work happens.

The OECD now recognizes that remote work happens everywhere, but tax presence only matters where business decisions or customer-facing activities happen. Under this new guidance, a “fixed place of business” is defined by a combination of time and intent:

• The 50% threshold: Working from a non-company location for more than half the year (or any 12-month period) establishes a potential “fixed” presence.

• Commercial substance: Even if the 50% time threshold is met, a PE is generally only triggered if the activity is commercial in nature — such as business development or local management — rather than for employee convenience or talent retention.

2. Digital permanent establishment

Some countries consider digital work arrangements and online business activities when determining PE. This allows them to tax international companies that derive value from local users, even without a physical office.

In India, the local government collects income taxes if you have a significant economic presence (SEP). You can be taxed on transactions for data or software downloads, streaming services, and online services, such as cloud storage or website services. The threshold starts at INR 20 million.

3. Agent-based permanent establishment

PE can be triggered through a dependent agent. This happens when an individual or other company in the country conducts business activities on your behalf, negotiates contracts, or closes sales.

How permanent establishment varies between countries

In the absence of a formal tax treaty, a country's domestic tax laws are the final authority on what constitutes a taxable presence.

Some countries consider remote work arrangements as temporary, so they don't lead to permanent establishment. For instance, in Germany, remote work employees won't trigger permanent establishment even if you:

• Pay for the home office and equipment

• Have no other physical workplace and require employees to work from home

According to German tax authorities, you need permanent authorization to use the employee's premises to trigger PE. This usually isn't the case for remote work setups. The company isn't considered “rooted” there because the employee maintains total control of their home. 

However, there’s a management exception. High-level executives can trigger PE through their decision-making activities, regardless of the physical space.

Other countries consider the permanence of remote work arrangements. Austria prioritizes the actual usage patterns of a “workplace.” Remote work can trigger PE if at least 50% of your employees' work happens at home and you haven't provided an office space.

How permanent establishment varies by industry

PE triggers vary by sector to reflect different operational realities. While the OECD gives a global baseline, many developing nations follow the UN model, which typically has lower thresholds for taxation. Here are some examples:

• Construction: Even though construction projects aren't permanent, their timelines can still trigger PE. In the OECD model, construction or installation projects trigger permanent establishment if they last more than 12 months. The UN model sets a lower threshold of six months.

• Consulting: Consulting rarely requires a fixed office, so tax authorities look at “presence” instead of “place.” In the UN model, consulting services should last at least 183 days in a 12-month period before triggering PE. The OECD model doesn't have a specific “service PE” clause (relying instead on the "fixed place" rule), though many countries add the 183-day UN rule into their bilateral treaties anyway.

• Brokerage: PE is based on an agent's dependency on the company. If your company oversees the agent from another country, you may trigger PE. The OECD model states that you can avoid PE if the agent acts independently or isn't exclusively acting on your behalf.

Risks and benefits of permanent establishment

Risks

The biggest risk of PE is unintentionally triggering tax obligations in another country before you've set up the right administrative systems. You’ll need local experts on your team, such as knowledgeable HR professionals, accountants, and tax professionals. You'll also need a legal team to navigate domestic tax laws. 

These unplanned tax obligations can lead to:

• Back taxes, interests, and penalties: PE creates tax obligations you didn't plan for, which can impact your budget.

• Regular taxes: Without a tax treaty, you may end up paying taxes for your business income twice. Other business taxes and withholding fees can also come into play. For instance, selling assets can lead to capital gains tax.

• Reporting obligations: Owing taxes means you must file tax returns and consider employment obligations, such as social security and benefits.

• Reputational impact: Unintentionally triggering PE can negatively impact your relationship with local employees or agents.

Benefits

Intentionally establishing PE, for instance, by creating a branch office, has strategic advantages:

• Credibility: A PE can provide operational legitimacy and credibility with local customers, partners, and authorities.

• Access to local incentives: Some jurisdictions offer tax incentives, grants, or reduced rates for businesses with a formal local presence.

• Market access: Having a PE may mean hiring local employees, opening bank accounts, and entering into contracts, which can give you access to the local market.

• Control and oversight: Directly managing local operations can be easier with a PE.

How to manage permanent establishment risk

The only way to undo PE is to discontinue the services or eliminate the factors that caused it. Mitigating PE can help you avoid potential tax liabilities and compliance burdens.

• Know the tax rules: Tax treaties vary by country. Learn the specific rules of your target country. If there's no tax treaty, research local laws about PE. Consult legal and tax experts for assistance.

• Draft compliant contracts: Make sure your contracts with employees and agents follow local laws. Avoid giving agents the power to finalize contracts unless it's absolutely necessary. Clearly define remote work arrangements in contracts.

Reduce PE risk with G-P EOR

G-P EOR gives you everything you need to hire compliantly in 180+ countries — without setting up entities. We have the largest team of in-region HR and legal experts in the industry to help you navigate PE, so you can build and manage your global team, without the risk.

Book a demo today.