This guide explains what permanent establishment is, how it works, all the tax implications to be aware of, and potential risks that you should avoid.
Permanent Establishment Explained
In the context of international tax law, a permanent establishment (PE) is a fixed place of business through which a non-resident entity carries on its business activities in a particular country. It is considered to be a taxable presence in that country and may be subject to taxes on profits earned there.
The concept of a permanent establishment is important because it determines when a non-resident entity is subject to tax in a particular country. If a non-resident entity does not have a permanent establishment in a country, it is generally not subject to tax on its profits earned in that country. However, if the entity has a permanent establishment in the country, it may be subject to tax on its profits earned in that country, depending on the tax treaty between the country where the permanent establishment is located and the country where the non-resident entity is resident.
The definition of a permanent establishment varies among different tax treaties and can include a range of business activities, such as a branch office, a factory, a warehouse, or even a salesperson working in a country for a certain period of time.
How Permanent Establishment Works
A permanent establishment (PE) is a fixed place of business through which a non-resident entity carries on its business activities in a particular country. It is considered to be a taxable presence in that country and may be subject to taxes on profits earned there.
The definition of a permanent establishment varies among different tax treaties and can include a range of business activities, such as a branch office, a factory, a warehouse, or even a salesperson working in a country for a certain period of time.
For example, if a company based in Country A establishes a branch office in Country B, it may be considered to have a permanent establishment in Country B. If the company earns profits from its operations in Country B, it may be subject to tax on those profits in Country B.
In order to determine whether a permanent establishment exists, the tax authorities in the relevant countries will consider a range of factors, including the nature and duration of the business activities, the degree of control exercised by the non-resident entity over the business activities, and the level of autonomy of the business activities.
It is important for businesses to understand the concept of a permanent establishment in order to properly structure their operations and comply with their tax obligations in different countries. They should also be aware of the tax treaties in place between the countries where they operate and the countries where they are resident, as these can impact the tax treatment of their profits earned in different countries.
What is virtual permanent establishment?
Virtual permanent establishment (VPE) is a term used to describe the concept of a permanent establishment that is not a physical place of business, but rather a virtual presence in a particular country. With the increasing use of the internet and other digital technologies, it is becoming more common for businesses to operate and sell products or services online, without necessarily having a physical presence in the countries where their customers are located.
In this context, the concept of a VPE is used to determine whether a non-resident entity has a taxable presence in a particular country, and whether it is subject to tax on its profits earned in that country.
The definition of a VPE can vary among different tax treaties, but it may include activities such as maintaining a website or other online presence, conducting business through social media or other online platforms, or engaging in e-commerce activities.
It is important for businesses to understand the concept of a VPE and how it may impact their tax obligations in different countries. They should also be aware of the tax treaties in place between the countries where they operate and the countries where they are resident, as these can impact the tax treatment of their profits earned in different countries.
Examples of what is considered a permanent establishment
There are several types of permanent establishment (PE) that can be recognized under international tax law. The specific types of PE that are recognized can vary among different tax treaties, but some common types include:
- Branch office: A branch office is a separate place of business that is physically located in a particular country and is used to carry on the business activities of the non-resident entity. For example, a company based in Country A may establish a branch office in Country B to carry on its business activities there.
- Factory: A factory is a place where goods are manufactured or produced. A non-resident entity may be considered to have a PE in a particular country if it operates a factory there.
- Warehouse: A warehouse is a place where goods are stored. A non-resident entity may be considered to have a PE in a particular country if it operates a warehouse there.
- Sales office: A sales office is a place where sales are made or where orders are received. A non-resident entity may be considered to have a PE in a particular country if it operates a sales office there.
- Construction site: A construction site is a place where construction work is carried out. A non-resident entity may be considered to have a PE in a particular country if it operates a construction site there.
- Service PE: A service PE is a place where services are provided. A non-resident entity may be considered to have a service PE in a particular country if it provides services there, such as consulting or engineering services.
What triggers permanent establishment?
The existence of a permanent establishment (PE) is typically determined by the level of business activity that a non-resident entity carries on in a particular country. In general, a PE is triggered when the non-resident entity carries on business activities in a particular country on a regular or continuous basis.
The specific activities that can trigger the existence of a PE can vary among different tax treaties, but they may include activities such as:
- Operating a branch office, factory, warehouse, or other fixed place of business in the country
- Providing services in the country on a regular or continuous basis
- Carrying out construction work in the country
- Selling goods in the country through a salesperson or agent who is present in the country for a certain period of time
- In order to determine whether a PE exists, the tax authorities in the relevant countries will consider a range of factors, including the nature and duration of the business activities, the degree of control exercised by the non-resident entity over the business activities, and the level of autonomy of the business activities.
It is important for businesses to understand the factors that can trigger the existence of a PE in order to properly structure operations and comply with their tax obligations in different countries. You should also be aware of the tax treaties in place between the countries where they operate and the countries where they are resident, as these can impact the tax treatment of their profits earned in different countries.
co-employment and permanent establishment
Co-employment refers to a situation where an individual is considered to be an employee of two or more entities at the same time. This can occur in situations where an individual is provided with services by one entity, but the individual is paid by another entity.
In the context of international tax law, co-employment can potentially impact the determination of whether a permanent establishment (PE) exists in a particular country. This is because the presence of an employee in a country can be one of the factors that triggers the existence of a PE.
For example, if an individual is employed by a company based in Country A, but the individual is providing services in Country B on behalf of the company, the individual’s presence in Country B may be considered to be a PE of the company in Country B.
It is important for businesses to understand the potential impact of co-employment on the determination of a PE in order to properly structure their operations and comply with their tax obligations in different countries. They should also be aware of the tax treaties in place between the countries where they operate and the countries where they are resident, as these can impact the tax treatment of their profits earned in different countries.
How the 2025 OECD Update Changed Permanent Establishment Tax Rules for Remote Workers
This permanent establishment tax guide covers the most significant recent change in PE law: the OECD’s November 2025 updated guidance on Article 5 of the Model Tax Convention. Under the new framework, remote employees who spend 50% or more of their working time in a foreign country now face automatic permanent establishment assessment — a rule that replaces the previous ambiguity around temporary cross-border work arrangements and creates a clear threshold that tax authorities can enforce against companies with distributed teams.
Before this update, companies could argue that a single remote employee working from another country did not constitute a permanent establishment because the activity was preparatory or auxiliary. The 2025 guidance closes that loophole by establishing that when an employee’s foreign work reaches the 50% threshold, the host country can treat the arrangement as a dependent agent permanent establishment. Companies hiring across borders in 2026 must now track where employees physically work and for how long — not just which entity issues their paycheck.
What happens to companies under permanent establishment?
If a non-resident entity is considered to have a permanent establishment (PE) in a particular country, it may be subject to tax on its profits earned in that country. The specific tax treatment of the profits earned by the PE will depend on the tax treaty between the country where the PE is located and the country where the non-resident entity is resident.
Under most tax treaties, the PE is taxed on its profits at the same rate as a resident entity. This means that the PE will be subject to the same corporate tax rate as a resident entity in the country where it is located.
However, some tax treaties may provide for a reduced rate of tax on the profits earned by the PE. For example, the tax treaty between two countries may provide for a reduced rate of tax on the profits earned by the PE if the PE is engaged in certain types of business activities, such as manufacturing or research and development.
It is important for businesses to understand the tax treatment of their profits earned through a PE in order to properly structure their operations and comply with their tax obligations in different countries. They should also be aware of the tax treaties in place between the countries where they operate and the countries where they are resident, as these can impact the tax treatment of their profits earned in different countries.
Double Tax Avoidance Agreements and Permanent Establishment Tax Obligations
Double Tax Avoidance Agreements (DTAAs) directly determine how permanent establishment tax obligations are split between two countries when a PE is triggered. This section of our permanent establishment tax guide explains how DTAAs work, which exceptions protect your company, and how the OECD’s 2025 anti-fragmentation rule changes the calculus for businesses relying on treaty exemptions. According to the OECD’s 2025 Article 5 update, over 3,000 bilateral tax treaties worldwide incorporate PE definitions — and the new anti-fragmentation provisions narrow the preparatory-activity exemptions that companies previously relied on to avoid permanent establishment tax liability.
Most DTAAs follow the OECD Model Tax Convention and include specific provisions that define what qualifies as a permanent establishment and what exceptions apply. Common exceptions include activities that are purely preparatory or auxiliary — such as storing goods, collecting information, or advertising — provided these activities remain genuinely incidental and not part of the company’s core operations. The OECD’s 2025 update tightened these exceptions by introducing an anti-fragmentation rule: companies cannot split a cohesive business into small operations to exploit preparatory-activity exemptions. If your company relies on DTAA exceptions to avoid permanent establishment classification, the 2025 changes may invalidate that position.
When a permanent establishment is established in a host country, the DTAA typically allows that country to tax profits attributable to the PE, while the home country provides either a credit or an exemption for the same income. The specific mechanism depends on the treaty — some follow the credit method, others the exemption method. Companies operating across multiple jurisdictions should map every DTAA that applies to their cross-border arrangements to understand which protections exist and where gaps remain.
What business situations lead to permanent establishment risk?
There are several business situations that can increase the risk of a non-resident entity being considered to have a permanent establishment (PE) in a particular country. Some common situations that can increase the risk of a PE include:
If a non-resident entity operates a physical place of business in a particular country, it may be considered to have a PE in that country.
If a non-resident entity provides services in a particular country on a regular or continuous basis, it may be considered to have a PE in that country.
If a non-resident entity carries out construction work in a particular country, it may be considered to have a PE in that country.
If a non-resident entity sells goods in a particular country through a salesperson or agent who is present in the country for a certain period of time, it may be considered to have a PE in that country.
With the increasing use of the internet and other digital technologies, it is becoming more common for businesses to operate and sell products or services online, without necessarily having a physical presence in the countries where their customers are located. However, maintaining a website or other online presence in a particular country may be considered to be a PE in that country.
Permanent Establishment Risk from Remote Workers in 2026
Permanent establishment risk from remote workers is the fastest-growing category of PE exposure in 2026. An employee who permanently relocates to another country — even with management’s informal approval — can create a fixed-place permanent establishment in that country, triggering permanent establishment tax liability for the employer. The risk is especially acute for employees in revenue-generating or decision-making roles, because their activities are more likely to be classified as core business operations rather than preparatory functions under permanent establishment tax rules. Ogletree Deakins’ 2026 cross-border remote work analysis reports that permanent establishment audits targeting companies with foreign remote workers increased 40% year over year.
According to Ogletree Deakins’ 2026 analysis of cross-border remote work permanent establishment risk, several jurisdictions have begun actively auditing companies whose employees work from abroad for extended periods. Tax authorities in Germany, France, and India have issued guidance stating that even a single employee working continuously from their country for more than 183 days can constitute a service permanent establishment. The UK’s HMRC has similarly increased enforcement on foreign companies with UK-based remote staff.
Practical mitigation steps include maintaining a centralized register of every employee’s work location and days spent in each country, implementing travel policies that cap foreign work below the 50% threshold defined in the 2025 OECD guidance, and using an employer of record to employ staff in countries where direct hiring creates permanent establishment exposure. Companies that fail to track cross-border work patterns face retroactive tax assessments, penalties, and interest charges that can reach years of unreported liability.
Protecting your organization from permanent establishment risk
There are several steps that businesses can take to protect their organization from permanent establishment (PE) risk. Some options include:
Tax treaties can impact the tax treatment of the organization’s profits earned in different countries and can help to determine whether a PE exists.
Depending on the specific circumstances of the organization, it may be possible to structure operations in a way that minimizes the risk of a PE. For example, the organization may be able to structure its operations in a way that avoids establishing a fixed place of business in a particular country.
In some cases, it may be possible to obtain an advance tax ruling from the tax authorities in the relevant countries, which can provide clarity on the tax treatment of the organization’s profits.
It may be helpful to seek advice from tax professionals, such as accountants or attorneys, who can help the organization understand its tax obligations and minimize the risk of a PE.
It is important for the organization to regularly review its operations to ensure that they are structured in a way that minimizes the risk of a PE and complies with its tax obligations in different countries.
Consider an employer of record
Using an employer of record (EOR) can potentially help to avoid permanent establishment (PE) risk in certain circumstances. For a full list of benefits of employer of record services, see our comprehensive guide. An EOR is a third-party company that acts as the employer for tax and employment purposes for individuals who are providing services to a client company.
In some cases, using an EOR can help to avoid PE risk by allowing the client company to outsource the employment and tax responsibilities for the individuals providing services in a particular country. This can be especially useful for companies that do not have a physical presence in the country where the individuals are providing services, as it can help to avoid the creation of a PE in that country.
However, it is important to note that the use of an EOR does not automatically avoid PE risk. The specific tax treatment of the profits earned by the individuals providing services through an EOR will depend on the tax treaty between the country where the individuals are providing services and the country where the client company is resident.
It is important for businesses to understand the potential impact of using an EOR on their PE risk and to seek advice from tax professionals if they are considering this option. They should also be aware of the tax treaties in place between the countries where they operate and the countries where they are resident, as these can impact the tax treatment of their profits earned in different countries.