Permanent Establishment: What Global Employers Need to Know

Expanding into a new country can begin with a single employee, sales representative or short term project. However, even without opening a local company, these activities may create a taxable business presence known as a permanent establishment.

Permanent establishment risk matters because it can expose a company to corporate income tax, registration duties, tax filings and penalties in another country. It may also affect how profits are allocated between the company headquarters and its overseas operations.

The risk is not limited to businesses with offices or branches. A remote employee working from home, a salesperson negotiating contracts or a consultant delivering services for an extended period may be enough to attract the attention of local tax authorities.

Understanding permanent establishment risk before entering a new market can help your company choose an appropriate operating structure and avoid unexpected tax obligations.

What is a Permanent Establishment?

A permanent establishment, commonly called a PE, is a taxable presence that a foreign company creates in another country.

Under the OECD Model Tax Convention, the traditional concept generally centres on a fixed place of business through which a company carries on all or part of its business. Common examples include a:

1. Place of management
2. Branch
3. Office
4. Factory
5. Workshop
6. Construction or installation site

A company may also create a PE without maintaining a formal workplace. Depending on the relevant domestic law and tax treaty, a person who regularly concludes contracts or plays the leading role in securing contracts may create a dependent agent PE.

Some tax treaties also recognise a PE when services, consultancy work or construction activities continue beyond a specified period.

The exact definition is not universal. Each country applies its domestic tax law, while an applicable double tax agreement may limit or clarify its taxing rights. The agreement between the two countries must therefore be reviewed for every international expansion.

Why is Permanent Establishment Risk Becoming More Important?

Companies can now enter new markets without immediately establishing local offices. Remote working, international hiring and flexible employment models have made global expansion more accessible.

However, these arrangements can blur the line between employing someone overseas and conducting business in that country.

A company may create PE exposure when an employee:

1. Works permanently from another country
2. Develops business within the local market
3. Negotiates commercial terms with customers
4. Regularly secures contracts for the company
5. Makes important management decisions
6. Delivers services to customers over an extended period

The company may not recognise the exposure until a tax authority reviews its activities, customer contracts, payroll records or employee responsibilities.

What Activities Can Create Permanent Establishment Risk?

The main triggers vary by country and tax treaty. Companies should pay particular attention to the following situations.

1. Maintaining a Fixed Place of Business

An office, branch, factory, workshop or other physical location can create a fixed place PE when the company uses it to conduct its business with a sufficient degree of permanence.

The company does not always need to own or rent the space directly. A location may still be relevant if it is effectively available for the company to use.

This is why coworking spaces, customer premises and employee home offices require a factual review rather than a simple check of the lease.

2. Allowing Employees to Negotiate or Conclude Contracts

A local employee or representative can create dependent agent risk when that person regularly binds the foreign company or plays a central role in contracts that the company routinely approves without significant changes.

Sales roles often create the clearest concern. Risk can also arise in account management, procurement, partnership development and senior leadership roles if the individual has meaningful commercial authority.

Requiring a foreign director to provide the final signature may not solve the issue if the local employee has already agreed to the essential terms and approval is largely procedural.

Tax authorities may look beyond who physically signs the agreement and examine who was responsible for securing it.

3. Employing Remote Workers in Another Country

Hiring someone to work from home does not automatically create a PE.

However, the risk can increase when the arrangement is continuous, the employee performs an important part of the business and the company has a commercial reason for the employee to be located in that country.

The OECD’s 2025 update provides clearer guidance for international home working. It states that a home will generally not be treated as a place of business of the company when the individual works there for less than 50 per cent of their total working time over a relevant twelve month period.

If the individual works there for at least 50 per cent of their time, the outcome depends on all the facts and circumstances. The commercial reason for the person’s presence is an important consideration.

4. Delivering Services Over an Extended Period

Some tax treaties contain a service PE rule. It may apply when employees or other personnel provide services in a country for more than a specified number of days within a stated period.

These rules can apply even when the company has no dedicated office.

Consulting, implementation, engineering, training and technology projects can therefore create exposure when personnel spend significant time at a customer site or another local location.

5. Running Construction or Installation Projects

Construction sites, installation projects and related supervisory work often receive separate treatment.

A PE may arise when the project lasts longer than the threshold stated in the applicable treaty. Depending on the countries involved, the threshold could be based on several months or a longer period.

Companies should consider the full commercial project rather than looking at each contract separately.

Splitting one project into several shorter contracts may not prevent PE exposure if the contracts form a commercially and geographically connected operation.

6. Moving Management Activity Overseas

If senior leaders make strategic and commercial decisions from another country, the company may face more than PE risk. Their activity could also raise questions about corporate tax residence or the company’s place of effective management.

This issue can arise when a founder, chief executive or managing director relocates but continues to direct the company’s operations from the new country.

Companies should obtain tax advice before a senior leader relocates rather than waiting until the next tax filing cycle.

7. Using a Local Subsidiary or Service Provider

A local subsidiary does not automatically create a PE for its foreign parent because the two are separate legal entities.

However, risk may arise if the subsidiary:

1. Habitually acts for the foreign parent
2. Negotiates or concludes the parent’s contracts
3. Makes its premises available to the parent
4. Performs activities that are effectively controlled by the parent
5. Operates primarily or almost exclusively for the parent

Similarly, using an independent contractor or an Employer of Record does not automatically eliminate PE risk.

Tax authorities will consider the foreign company’s business activities, the worker’s actual authority and the relationship between the parties.

What Happens If a Company Creates a Permanent Establishment?

The consequences depend on local law and the relevant tax treaty. They may include:

1. Corporate income tax on profits attributable to the PE
2. Local tax registration
3. Annual corporate tax filings
4. Local accounting and record keeping obligations
5. Transfer pricing documentation
6. Withholding tax changes for certain payments
7. Interest and penalties for late registration
8. Reviews of earlier tax periods
9. Increased scrutiny of related group transactions

Only the profits attributable to the PE are generally taxed in the host country under a typical treaty approach.

Determining that amount can still be complex. The analysis may consider the functions performed, assets used and risks assumed by the local operation as though it were a separate business.

For example, a salesperson who generates significant revenue may cause more profit to be attributed to a PE than an employee who performs limited administrative tasks.

A PE review should also consider obligations outside corporate income tax.

Payroll withholding, social contributions, immigration rules, employment law, value added tax and goods and services tax may apply under separate tests.

A company can therefore have employment or indirect tax duties even when it does not have a PE.

How to Assess Permanent Establishment Risk

A useful assessment begins with the facts rather than the proposed job title or contracting structure.

1. Review Where Work Will Take Place

Record the countries where employees, contractors and directors will perform their duties.

Include:

1. Home offices
2. Coworking spaces
3. Customer premises
4. Temporary project sites
5. Associated company offices
6. Locations used during international travel

The assessment should reflect the person’s actual working arrangement rather than only the address stated in their contract.

2. Map Each Person’s Responsibilities

Document who:

1. Develops leads
2. Negotiates commercial terms
3. Approves discounts
4. Signs contracts
5. Manages customer relationships
6. Delivers services
7. Controls budgets
8. Makes strategic decisions

Compare written policies with actual working practices. A policy that limits an employee’s authority will provide little protection if the employee regularly acts beyond it.

3. Check Domestic Law and The Relevant Tax Treaty

Review the PE definition under local law and any double tax agreement between the countries involved.

The review should cover:

1. Fixed place rules
2. Dependent agent provisions
3. Service PE rules
4. Construction and installation thresholds
5. Preparatory or auxiliary activity exemptions
6. Profit attribution requirements

Do not assume that a threshold or exemption from one country applies in another market.

4. Measure Duration and Working Patterns

Track employee location, business travel, project days and time spent working from a home office.

This information can be essential when a rule depends on continuity or a day threshold.

The company should also monitor connected projects and visits by different employees. Local activity may need to be considered collectively rather than separately.

5. Identify the Commercial Reason for Local Presence

Ask whether the person’s location helps the company access:

1. Customers
2. Suppliers
3. Talent
4. Business partners
5. Natural resources
6. Associated companies
7. Other commercially important resources

A location that advances the company’s commercial activity may carry more risk than one selected solely for the worker’s personal convenience.

6. Assess Profit Attribution and Related Obligations

If a PE may exist, estimate which profits could be attributed to it and identify the registration, accounting and filing requirements.

Review payroll, employment, immigration and indirect tax obligations separately. These areas can apply even when the company concludes that no PE exists.

How Can Companies Reduce Permanent Establishment Risk?

The goal is not to avoid legitimate tax obligations. It is to understand exposure early, choose an appropriate structure and maintain evidence that reflects how the business really operates.

1. Complete a Risk Review Before Hiring

Assess the proposed country, role, authority, working location and expected duration before making an offer.

Involve tax, legal, finance and people teams when the position includes:

1. Sales responsibilities
2. Customer negotiations
3. Management authority
4. Contract approval
5. Business development
6. Long term customer projects

Early assessment gives the company more options to adjust the role or choose a suitable operating structure.

2. Define Authority Clearly

Set written limits for contract negotiation, pricing approval and signature authority.

The company should specify:

1. Who can negotiate commercial terms
2. Who can approve discounts
3. Who can commit the company to an agreement
4. Who can sign customer and supplier contracts
5. Which decisions require headquarters approval

Day to day conduct must match these limits. A policy that is routinely ignored will provide little protection during a tax review.

3. Establish an International Remote Work Approval Process

Require employees to obtain approval before working from another country.

The approval process should capture:

1. The country and city
2. The proposed dates
3. The reason for the arrangement
4. The employee’s responsibilities
5. Customer or supplier interactions
6. Contract authority
7. The expected working location

The company should reassess arrangements that extend beyond their original duration.

4. Monitor Cumulative Activity

One short visit may appear low risk, but repeated visits by several employees can create a different result.

Maintain a central record of:

1. International travel
2. Customer projects
3. Employee working locations
4. Local contract involvement
5. Construction or installation activities
6. Time spent at customer premises

This information can help the company identify exposure before it passes a relevant threshold.

5. Separate Supporting Work From Commercial Decision Making

Where appropriate, keep final negotiation and commercial decision making with authorised teams in the company’s established locations.

Local employees should understand which activities they can perform and which decisions must be referred to headquarters.

This structure must reflect actual conduct. Moving the final signature overseas will not necessarily reduce risk if the local employee has already agreed to every important term.

6. Consider a Local Entity When Activity Becomes Substantial

If the company plans to build a lasting customer base, employ a large team or place senior decision makers in the country, a local entity may provide a clearer operating structure.

The company should compare the cost of establishing an entity with the tax, administrative and governance exposure of operating without one.

Establishing a local company may become more appropriate when:

1. The local team is growing rapidly
2. Employees are generating significant revenue
3. The company requires a permanent office
4. Senior leaders are based in the market
5. Long term customer contracts are being signed
6. The company expects substantial local operations

7. Obtain Country Specific Tax Advice

PE is a tax treaty concept applied through domestic rules and local practices.

Qualified tax advisers can assess the relevant countries, model potential tax exposure and confirm registration requirements.

The assessment should be updated whenever the company changes an employee’s responsibilities, extends a project or increases its local commercial activity.

Does using an Employer of Record Remove Permanent Establishment Risk?

An Employer of Record can legally employ workers, administer payroll and support compliance with local employment requirements where a company does not have its own entity.

This can make international hiring faster and reduce the administrative work involved in managing employees across countries.

However, an Employer of Record is not a tax shield.

PE exposure usually depends on the foreign company’s activities in the country, including:

1. What the employee does
2. Where the work takes place
3. Whether the employee negotiates contracts
4. Whether the employee generates local revenue
5. How much authority the employee holds
6. Why the company needs the employee in that country

The use of an Employer of Record should therefore sit alongside a separate tax assessment.

Hire and Manage Global Talent With Greater Confidence

Expanding internationally involves more than finding the right person. Your company must also manage employment contracts, payroll, statutory contributions and local employment requirements.

Glints TalentHub helps companies hire, onboard, pay and manage professionals across markets through one unified solution. You can receive local employment support while coordinating with qualified tax advisers to assess permanent establishment exposure and choose an operating model that fits your expansion plans.

This combined approach can help your business move faster while maintaining clearer visibility over its employment and tax responsibilities.

Final Thoughts

Permanent establishment risk should not stop a company from hiring talent or serving customers internationally. It should shape how the expansion is structured.

An early review gives the company more options. It can adjust responsibilities, introduce clearer approval controls, use an Employer of Record for employment support or establish a local entity when the business case is strong enough.

Waiting until a tax authority raises questions can leave the company managing backdated filings, penalties and uncertainty.

Glints TalentHub supports the employment side of global expansion, helping companies hire and manage professionals compliantly across markets. Combined with country specific tax advice, this gives your business a more informed path from its first overseas hire to a scalable international operation.