Permanent establishment (PE) is a concept that involves a lot of gray areas. It varies from country to country but determines when a company crosses the line from sporadic business proceedings to permanent ones, which can then be taxed and create revenue for the country hosting the business. With a plan for approaching PE, many enterprises can prepare for these charges and strategize about which locations are best to conduct business, such as those with friendly tax treaties.

Successfully managing PE provides many benefits, while ignoring it or trying to slip under the radar could have significant financial and legal consequences for a company. It is critical to understand when and where PE could become an issue, especially if globalization is on the horizon.

Permanent Establishment

Permanent Establishment

The definition of permanent establishment changes between countries. Each one may have a different set of criteria, but the term typically refers to business activity that is stable, ongoing, and generates revenue within the host country. It applies to consistent business activities, not sporadic or infrequent ones. A significant component of it is having a fixed place of business, though that isn’t the only requirement.

While there is no global legal power for enforcing PE, the Organisation for Economic Cooperation and Development (OECD) is the leading international body that many countries and professionals look to for guidance.

Some generally accepted criteria include the following:

  • There must be a fixed place of business, such as a permanent address, bank account, or other physical presence. If employees regularly occupy a building to conduct business, it could be seen as PE. The building doesn’t need to belong to the organization, either, as coworking spaces, rentals, and even an employee’s home could be PE.
  • Employees conduct activity in the country that generates revenue. Straight sales aren’t the only concern, as marketing tactics, negotiating contracts, and many other business activities can be considered revenue generation in a broader interpretation of the term. Some countries will stick to a standard definition and others are more inclusive.
  • The activity is conducted within a sufficient time frame. This aspect can vary among countries and industries, but generally, the activity would have to occur for a set amount of time before it is considered PE. Countries may view this timeframe as a continuous period, such as six months or longer, or a cumulative number of days within a certain period. They might use the fiscal year to determine where these points start and end, and some businesses take advantage of fiscal year systems by working across two years, effectively splitting their time in the country into two smaller parts.
  • The employee or business conducted is under the control of the parent company in another country. Typically, this criterion refers to agents making deals and negotiations. If the agent is independent, such as one who has an array of clients outside of your company, then they aren’t under your company’s control. Alternatively, a dependent agent specifically for your company would typically trigger PE. Another factor of PE is the agent’s authority to sign contracts on behalf of the business.

Due to these criteria, most countries have multiple types of PE that they can trigger, such as those based on their location, agents, or services offered. To determine whether your business is a PE, run through this permanent establishment checklist.

Does your business…

  • Have employees that work at a regular, fixed site? If they return to the same place when they visit, especially if that place is owned or rented by the corporation, it is likely habitual activity.
  • Conduct work at that location? If business activities related to the main goal of the company occur there frequently, it is more likely to be PE.
  • Make revenue from the work? Where revenue is generated, you increase the likelihood of being considered a PE.
  • Have dependent agents with the authority to conclude contracts? Even without a fixed place of business, agents working for the company can create PE.

How PE Varies Between Countries

Certain countries are more strict in their enforcement and identification of PE, while others take a relaxed approach. In general, the countries that are lenient tend to be those that are interested in economic growth and attracting investments, and those that are strict are more established.

China, for example, takes a very broad approach to PE, encompassing a wide array of businesses and work. Many parts of Europe are aggressive in pursuing PE regulation.

How PE Varies Between Industries

Since industries can have vastly different business models, it’s no surprise that PE differs in its application to specific fields. Some countries will outline these specifications clearly while others use a broader description to encompass the work.

Here are some areas where PE has special considerations:

  • Construction: Since these projects aren’t permanent, PE usually looks at the length of the project. Many countries look for continual activity over a six-month span.
  • Consulting: Many consulting service businesses do not have a fixed place of business, so PE looks to non-physical business activities. These can vary by time and service type, but a common approach is to see if services happen for 183 days or more within a 12-month period, which is sometimes the same as the tax year.
  • Agents and brokerage: For industries with agents or brokers, PE considers these individuals’ dependency on the parent company. They cannot be controlled by the company in a foreign country if that company wants to avoid PE.

Another important and changing sector is digital sales and e-commerce. Most tax laws and treaties were created before the boom of e-commerce and the popularity of digital transactions. Because of that aspect, countries have had to challenge traditional definitions of PE. Criteria are quickly changing and are fairly inconsistent across nations.

Many companies try to lean into virtual communications and e-commerce, thinking they can avoid PE by doing so. While this strategy may have worked in the past, more and more countries are closing this loophole. They may use revenue generation as the sole criteria for PE, which can include online sales, server hosting hubs, and news media aggregation. Any company that relies on virtual communication with international entities to make money needs to consider the possibility of virtual PE. If it doesn’t already apply to you, it may in the future, and you can readily anticipate it.

One strategy that some European countries are looking at is a straightforward digital tax that bypasses much of the complexity of PE rules. The UK is looking at a Digital Services Tax, which would apply a 2% levy to revenues that come from UK activity on search engines, online marketplaces, and social media platforms. It would target the biggest tech behemoths and tax revenue generated with the help of users’ data. The EU is looking at similar proposals with a 3% levy.

Risks and Benefits of Setting Up a PE

Risks and Benefits of Setting Up a PE

Before doing business in a foreign country, it is critical that you gauge permanent establishment risk and understand what it can mean for your company. Intentionally setting up PE can provide several benefits and help you manage global expansion. Knowing how to avoid permanent establishment risk can also be important if you’re conducting temporary work there.


Most of the advantages of setting up a PE comes down to planning.

  • It reduces the possibility of surprise taxes. A sudden trigger of PE can result in penalties and interest charged for the period you weren’t paying. Of course, it also starts charging you foreign taxes, which you may not have budgeted for when you initially looked at expanding.
  • It offers peace of mind that you’re abiding by the laws of the host country and paying your dues. You don’t have to worry about tiptoeing around authorities and the risk of being seen as someone trying to skirt their taxes.
  • You can find ways to improve your tax efficiency and find the best framework for revenue generation. It may also be easier to work with authorities and create a better relationship with the host country.


While there are sizeable benefits, the risks of PE are significant.

  • You open yourself up to unpredicted taxes. If you haven’t planned for PE, these additional charges can be hefty and throw off your budget. Whether you are trying to trigger PE or avoid it, planning for the possibility is always a good idea. Thorough research into the country and local laws will help you understand how much risk you’re taking on.
  • You might be paying double the taxes. Depending on the infrastructure of your business, you may end up paying taxes in your home country as well as the host country. Even without triggering PE, you may see business taxes and withholding fees on gross payments from a foreign country. Tax treaties between countries can help manage these charges with things like lenient criteria or lower rates for partner countries. Another option to help with foreign taxes is to look for tax credits from the home country.
  • You could hurt your reputation. If you don’t prepare for PE, you may be seen as uncooperative and not paying your fair share. Your relationship with the country and its residents could be at risk, which would be a major marketing issue for many businesses.
  • You may deal with more audits and discussions with tax authorities. More audits mean spending more time and money on them.
  • You could face interest charges and penalties. If you’ve been flying under the PE radar for a while, you could receive interest charges based on the taxes you should have been paying throughout that time. Other penalty charges can also be significant.
  • You could have more reporting obligations once PE is triggered. Payroll and social security are significant concerns, as some countries have substantial requirements for them.


FAQs for Permanent Establishments

PEs can be complicated. Here are few commonly asked questions about them.

1. What’s the Difference Between a Permanent Establishment and a Subsidiary?

The two are very close and there is little difference, though the subsidiary usually runs more like a domestic company. It could be considered a PE if it has strong control from the parent company.

2. Can Individuals Trigger PE?

Generally speaking, no. PE affects corporate taxation, not individuals. Independent contractors and sole proprietors wouldn’t typically trigger PE.

3. What Is Considered Habitual Activity?

A brief, one-time visit to scope out the market wouldn’t be habitual. If you made many long trips over the course of a few years, you’re moving into habitual territory. Other examples of habitual use include projects longer than six months in duration.

4. What Activities Do Not Create PE?

If activities are auxiliary or preparatory, they typically will not trigger PE. These activities are not an integral and significant part of overall business activity. If the general purpose of the activity is the same as that of the business, it is likely not auxiliary or preparatory and could trigger PE.

5. Are Partnerships Permanent Establishments?

The answer to this question depends on how active the foreign partnership is in relation to the host country partner. Some countries will activate PE for less-involved partnerships than others.

6. How Is PE Changing?

Many tax authorities are growing more aggressive about finding instances of PE. A study by PwC found that 63% of business respondents agreed. With the growth of virtual business practices, we can expect changes that address e-commerce and other forms of remote revenue generation.

7. Does a Rental Property Count as a Permanent Establishment?

Typically, having a rental property isn’t enough to trigger PE. If, on the other hand, you’re using it as a place to conduct regular business, then it probably would. Leasing businesses can also create PE from having multiple properties.

Setting Up a PE

If you’re looking at global expansion and want to set up a PE, the process can vary but generally includes these steps:

  • Do your research. Of course, any foray into international business dealings requires extensive research. You’ll need to look at the PE tax amounts, what parts of your potential revenue will be taxed, how much you’ll be spending to conduct business in the host country, and what the differences in hiring and payroll will look like.
  • Compare options. If you’re considering multiple countries, look at the factors that will influence profits from each one, such as more lenient tax treaties or domestic tax credits for foreign activity.
  • Prepare the paperwork. Creating a PE entails registering your business with local authorities at the right time. If you don’t, you may incur penalties.

One part of a PE that can become complicated is managing the hire of foreign employees. A global professional employer organization (PEO) simplifies the task by operating as the in-country employer. Pay comes from the PEO, along with benefits. Other helpful components include access to an expansion platform that helps manage business in foreign countries.

Contact Globalization Partners About Developing a Permanent Establishment



Permanent establishments are often a necessary part of expanding a business. They allow for a wider reach and easy access to resources that may not be located in the home country. But they come with their share of risks. Between taxes, compliance issues and the task of hiring foreign employees, setting up a PE in another country isn’t always straightforward.

Globalization Partners is a global PEO that takes care of compliance so you can focus on other aspects of business growth. To learn more about our comprehensive solution and how Globalization Partners can help you with PE challenges, contact us today.

For more information regarding PEOs, download our eBook 20 Questions to Ask Before Choosing a Global PEO:

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