EOR and Permanent Establishment Risks Explained

There are several factors that can create a PE, including:

• Having a physical office, factory, or branch in a foreign country.
• Having employees working in a foreign country.
• Carrying out business activities through agents or other intermediaries in the foreign country.

The most prominent risk of using an EOR is the fact that your company can be deemed the actual employer of employees in court. This can occur if the EOR is considered to be acting as an agent for the company or if the employees hired through the EOR are deemed to be working for the company rather than the EOR in a court case. If you are deemed the actual employer, you become subject to the taxes and costs associated with having a PE in that country. You can also be subject to double taxation.

If you’re hiring several employees in a country or they have worked for you for more than a year, you run the risk of being deemed the actual employer and facing costs associated with not having a permanent establishment in the country you hired from.

Most countries don’t set a maximum number for EOR workers, but there are rules of thumb. “If you have one or two employees for six to 12 months, subject to the activities of the individuals, you should generally be fine. By the time you have six employees for two or three years, however, your ability to argue you don’t have a PE is going to be difficult,”.

Tom Lickess
Global Head of International Tax Advisory – Vistra

There is no rule of thumb for how many employees you can have in one location and how long they can work for you. Every country has different regulations around this subject. It’s important to be aware that the more people you hire, and the longer those hires work for your company, you become increasingly at risk if you don’t have a permanent establishment.

Even if your company does not have a physical presence in the country, you can still be considered to have a PE in a foreign country. For example, if your company regularly carries out business in a foreign country through your website or through the use of independent contractors, you may be considered to have a PE in the foreign country.

The determination of whether a company has a PE in a foreign country is typically made on a case-by-case basis, taking into account the specific facts and circumstances of the company’s business activities in the foreign country.

“Perhaps a US company with a small UK-based sales team doesn’t believe it has a taxable presence in the UK, so it pays US taxes on its earnings attributable to for example UK or European customers,” Lickess says. “If the UK tax authority determines that the UK-based team constitutes a taxable presence or permanent establishment of the US company, then UK corporate tax may well be levied on this same income that has been subject to US tax.” Penalties and interest may also apply.

Tom Lickess
Global Head of International Tax Advisory – Vistra

There is no specific list of roles or positions that automatically require a permanent establishment (PE) in a foreign country. Rather, the presence of a PE is determined based on the nature and extent of a company’s business activities in a foreign country.

Your company becomes liable for corporate income tax on profits attributed to the PE. Tax authorities calculate this using the “force of attraction” principle or the “limited force of attraction” approach outlined in OECD Model Tax Convention Article 7, meaning they may tax not just PE-related income but all income from similar activities in that country. According to a 2025 KPMG survey, average effective corporate tax rates across OECD countries range from 23.1%, making unexpected PE tax bills substantial.

If the country where PE is triggered lacks a double taxation treaty with your home country, the same income gets taxed twice. The UN’s 2025 Report on Treaty Practices notes that over 40% of developing countries lack comprehensive tax treaties with major economies, leaving companies exposed to full double taxation with no relief mechanism. This can effectively double your tax burden on foreign-sourced revenue.

Tax authorities commonly audit retroactively. The UK’s HMRC can assess back taxes for up to 20 years in cases of deliberate non-compliance, according to HMRC’s Compliance Handbook. Penalties range from 0% for unprompted disclosures to 100% of tax due for deliberate concealment. Interest accrues on unpaid amounts from the original due date, compounding the total cost significantly.

Your company must register for corporate tax, file annual returns, maintain local accounting records, and potentially appoint a local tax representative. A 2025 EY Global Tax Alert survey found that the average cost of establishing local tax compliance infrastructure in a new jurisdiction runs between $50,000–$150,000 in the first year alone, including legal fees, accounting systems, and administrative overhead.

If your EOR-hired employees actively close deals, sign contracts, or negotiate terms on behalf of your company, tax authorities can determine they constitute a dependent agent permanent establishment under Article 5 of the OECD Model Tax Convention. A 2024 Deloitte analysis of PE cases found that sales-related activities were the single most common trigger for agency PE determinations, accounting for 38% of cases reviewed across 12 jurisdictions.

Hiring executives or country managers through an EOR signals to tax authorities that strategic decision-making happens locally. The OECD’s 2024 commentary on Article 5 explicitly notes that a person who “habitually exercises authority to conclude contracts” in a country creates an agency PE regardless of employment structure. A country manager with hiring authority or budget control is a red flag that an EOR arrangement alone cannot resolve.

Even supporting employees can create PE risk if their activities establish a pattern of sustained market engagement. A 2025 PwC Global Tax Policy survey found that 62% of tax authorities now examine the cumulative effect of business activities rather than individual transactions when making PE determinations. If your EOR employees are building client relationships, attending local trade events regularly, or generating leads, these activities may collectively constitute a PE even though no single employee crosses the threshold.

No. An EOR significantly reduces PE risk by acting as the legal employer and creating separation between your company and foreign-based workers, but it cannot eliminate risk entirely. Activities like revenue-generating sales, contract negotiations, and strategic decision-making by employees in the host country can still trigger PE regardless of the EOR arrangement. A 2025 PwC survey found that 62% of tax authorities now examine cumulative business activity patterns when making PE determinations, meaning even supporting roles can contribute to a PE finding.

There is no universal threshold, but most tax practitioners consider 5–6 employees in a single country for 2+ years as the point where arguing against PE becomes difficult. Tom Lickess, Vistra’s Global Head of International Tax Advisory, notes that one or two employees for 6–12 months is generally manageable, but six employees for two to three years makes defending against a PE determination significantly harder. Each country applies its own criteria, and factors like the nature of work, seniority, and revenue contribution all factor into the assessment.

Using an EOR means the EOR handles employment-related tax obligations (payroll taxes, social contributions, withholding) on your behalf. However, if your company is deemed to have a PE, you become directly liable for corporate income tax in that jurisdiction — which is separate from employment taxes. A 2024 KPMG survey found that companies using EORs still face corporate tax audits in 15% of cases where tax authorities challenge the EOR arrangement’s sufficiency. See our guide on EOR tax implications for a full breakdown of what taxes apply.

A fixed-place PE arises when your company has a physical location (office, factory, branch) in a foreign country where business is carried on continuously. An agency PE arises when a person — including an EOR — habitually exercises authority to conclude contracts on your company’s behalf in that country, even without a fixed location. The OECD Model Tax Convention Article 5 defines both types, and an EOR can inadvertently create an agency PE if its role extends beyond employment administration into contract conclusion or deal negotiation. See our permanent establishment guide for the full framework.

Choose an EOR that has a track record of compliance with local employment laws and a strong reputation in the country where the employees will be working. This can help reduce the risk of the EOR being considered an agent of the company, which could create a PE.

Have a clear written agreement in place between the company and the EOR outlining the EOR’s responsibilities and the company’s lack of control over the EOR’s activities. This can help demonstrate that the EOR is acting as an independent contractor rather than as an agent of the company.

Make sure that the employment relationship between the EOR and the employees is clear and that the employees are considered to be working for the EOR rather than the company. This can be achieved through the use of appropriate documentation and by ensuring that the EOR has reasonable control over the employees’ work and decisions related to their employment.

To minimize the risk of the EOR being considered an agent of the company, consider limiting the scope of the EOR’s activities to those that are necessary for the proper functioning of the company’s business in the foreign country. Avoid giving the EOR broad authority to act on behalf of the company in a foreign country.

PE laws and regulations can change over time, so it is important to regularly review your company’s business activities in a foreign country and assess whether they could potentially create a PE. If the risk of a PE is identified, consider taking steps to mitigate the risk, such as by modifying the company’s business activities or the relationship with the EOR.

One reason your company may want to switch to a permanent establishment is if you plan to carry out significant business activities in a foreign country over an extended period of time. In this case, the costs and benefits of establishing a PE may outweigh those of using an EOR.

Another reason you may want to switch to a PE is if you are at risk of creating a PE through the use of your EOR. If the EOR is considered to be acting as an agent of the company or if the employees hired through the EOR are considered to be working for the company rather than the EOR, your company may be at risk of being taxed as if it had a PE in the foreign country. In this case, establishing a PE may be a more appropriate way for the company to conduct its business activities in a foreign country.

Before switching from an EOR to a PE, it is important for the company to carefully consider the costs and benefits of each approach and to consult with legal and tax advisors to ensure that it is making the best decision for your business.