Permanent Establishment (PE) Risk

Permanent establishment (PE) risk is the chance that a company's activities in another country, often through one employee, create a taxable presence there. That country can then tax part of the company's profits.

PE is a corporate tax concept, so tax professionals decide it. HR spots the facts and escalates them early. The OECD's Model Tax Convention is the template behind most treaty definitions.

How Can an Employee Abroad Create a Permanent Establishment?

Article 5 of the OECD Model defines a PE as a fixed place of business through which a company carries on its business. Offices, branches and factories are classic examples.

A second route needs no office. Under Article 5(5), a person who habitually concludes contracts for the company in that country, or plays the principal role in concluding them, can create a PE. Independent agents are generally excluded.

What Did the OECD Say About Remote Workers?

In November 2025 the OECD added new Commentary on home offices in its 2025 update to the Model Tax Convention. A home generally is not a company's place of business if the person works there for less than 50 percent of their working time over a twelve-month period.

At or above 50 percent, the facts decide. A key question is whether the company has a commercial reason for the person to be there, such as meeting customers or managing suppliers.

Allowing home work solely to keep someone, or to save office space, is not a commercial reason. This guidance interprets treaties and does not replace them.

Why Do Treaties Give Different Answers?

Each country pair negotiates its own treaty, and the wording varies. The IRS reminds its examiners that every U.S. income tax treaty is different, and the same is true worldwide.

The services clause is optional. The Commentary offers it as wording countries may agree bilaterally.

What Happens If a Permanent Establishment Exists?

The host country can tax the profits attributable to the PE. For a foreign company in the United States, the IRS explains that a treaty generally limits U.S. tax to profits attributable to a U.S. PE.

In many countries a PE also brings registration, payroll withholding and social security duties, plus penalties for late filing. Our guide to global payroll compliance covers the payroll side.

The employee's personal tax is separate. For the U.S. version, see our resident and nonresident alien tax guide.

What Should HR Flag to Tax?

HR does not run the PE analysis. It puts the right facts in front of the people who do. These triggers justify a call to tax:

• An employee plans to work abroad for months, or already does most of their work there.
• A person abroad negotiates or signs contracts, or manages local customers or suppliers.
• A hire in a country where the company has no entity, as covered in our guide to hiring international employees.
• A request to extend a temporary stay, or a project team that keeps growing locally.
• Work location data showing time spent outside the home country.

Pair these flags with remote work policy compliance, and review broader HR compliance. Global mobility and shadow payroll are related topics.

HR Cloud keeps employee records in one place through its HRIS, so role and location details are easy to find when tax asks.

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Frequently Asked Questions

Q: Does a permanent establishment mean the employee owes tax in that country too?

A: Not automatically. Personal income tax follows residence and treaty rules, which are separate from the employer's PE question.

Q: Does a short stay abroad create a permanent establishment?

A: Usually not. In one OECD example, three consecutive months working from a rental abroad creates no PE because the place lacks permanence. Local law and treaties can differ.

Q: How is working time measured for the 50 percent test?

A: The OECD says actual conduct decides. Contracts and policies can help only where they match what the person actually does.

Q: Does the United States use the same test for foreign employers?

A: Without a treaty, a foreign company is taxed on income connected with a U.S. trade or business, which the IRS says is broader than a PE. A treaty generally narrows it to a PE.

Q: Does a local subsidiary protect the parent company?

A: Not by itself. Article 5(7) says controlling a subsidiary does not alone create a PE, but parent employees acting locally still can.

Q: Is the OECD 50 percent guidance binding?

A: No. It is Commentary, and countries such as Israel, Nigeria and the Czech Republic have recorded reservations or different positions.