Permanent establishment (PE) is a fixed place of business, or a dependent agent, through which a company resident in one country carries on business in another, giving that other country the right to tax the business profits linked to it. The concept, written into most double taxation treaties, marks when trading with a country becomes taxable business inside it.
Without a PE, a treaty normally lets only the company's home state tax its business profits, though the source country may still charge withholding tax on dividends, interest and royalties. PE is a separate question from tax residency, which concerns where a company belongs, and from controlled foreign company rules, which tax a parent on a subsidiary's income. Once a PE exists, transfer pricing principles decide how much profit it should be credited with.
Permanent establishment in plain terms
Think of a food truck from one town that drives into the next town's market for a single day, sells sandwiches and leaves. Most people would say it is still a business from home. Now imagine it rents a stall in that market, sets up a counter and comes back every day for a year. At that point it looks like part of the local market, and the local council expects it to pay local fees.
Permanent establishment is the tax version of that line. A company can sell to customers abroad, ship goods there and send staff on short visits without owing that country business tax. Once it has a lasting base there, such as an office, a workshop or a person who regularly signs deals on its behalf, the other country gets to tax the profits made through that base.
Legal basis in the OECD Model
The standard definition is Article 5 of the OECD Model Tax Convention on Income and on Capital, which most bilateral treaties follow closely; Article 7 then limits the source country to taxing the profits attributable to the PE. The United Nations Model Double Taxation Convention, used by many developing countries, starts from the same text but gives source countries somewhat wider taxing rights. Article 5 recognises several routes to a PE:
- A fixed place of business. Examples listed include a place of management, a branch, an office, a factory, a workshop and a mine, oil or gas well, or quarry.
- A construction or installation project. A building site counts only if it lasts more than 12 months under the OECD Model, against six months under the UN Model.
- A dependent agent. A person who habitually concludes contracts in the company's name, or plays the principal role leading to them, can create a PE even without premises.
Activities of a preparatory or auxiliary character, such as storing goods or purchasing, do not create a PE, and a genuinely independent agent acting in the ordinary course of its own business is excluded.
BEPS Action 7 and treaty changes
The OECD/G20 base erosion and profit shifting (BEPS) project found that groups were avoiding PE status artificially. Its 2015 final report on Action 7, "Preventing the Artificial Avoidance of Permanent Establishment Status", targeted two techniques. One was the commissionaire arrangement, under which a local company sells in its own name but for a foreign principal, so the principal had no PE. The other was splitting activities into fragments that each looked preparatory or auxiliary.
The fixes were written into the 2017 update of the OECD Model and offered to existing treaties through the Multilateral Instrument, signed in Paris in June 2017. Countries could opt out of the PE provisions, and many did.
Remote work and the digital PE debate
During the pandemic, OECD guidance said home working forced by travel restrictions should not normally create a PE. The 2025 update to the Model's commentary, approved in November 2025, added a benchmark: an employee working from a home office abroad for less than 50 percent of their working time over 12 months generally does not create one, while higher use calls for a closer look, including whether there is a commercial reason for the arrangement. Employers also track the 183-day rule, which governs the employee's personal tax.
The larger challenge is the digital economy. A company can earn large revenues from users in a country without any office there, so the physical-presence test lets much of that profit escape source taxation. India added a "significant economic presence" test to its domestic law in 2018, and several countries, including France and the United Kingdom, introduced digital services taxes on revenue instead. The OECD's Pillar One proposal would have reallocated taxing rights over the largest groups' profits regardless of presence, but its multilateral convention has not entered into force, and the United States said in January 2025 that the global tax deal has no force there.
Consequences of having a PE
A company found to have a PE must usually register in that country, file returns, keep separate accounts and pay corporate tax on the attributable profits. Because the home country normally gives relief for that tax, the main risk is cost and dispute rather than double taxation, although relief can fail when the two countries disagree. For a multinational corporation, PE risk shapes how sales teams, servers and executives are deployed, and it is one reason structures relying on a holding company in a tax haven now need real economic substance. The line between careful planning and tax avoidance or evasion often turns on whether reported activities match what actually happens on the ground.