What is Permanent Establishment Risk?
Permanent establishment risk is the risk that a company's activities in another country create a sufficient taxable business presence for that country to tax some of the company's profits. A company does not necessarily need to open a formal subsidiary or branch to create a permanent establishment. Depending on the applicable country's laws and tax treaty, an office, employee's activities, home office, construction project, or person negotiating and concluding contracts may potentially create one.
That means a company can establish a taxable presence somewhere without intentionally establishing a legal entity there. For employers managing distributed or international workforces, understanding permanent establishment risk is an important part of evaluating where employees work, what they do, and how much authority they have.
Table of Contents
Why Does Permanent Establishment Matter?
What Can Create Permanent Establishment Risk?
Does a Remote Employee Automatically Create Permanent Establishment?
What is a Dependent Agent Permanent Establishment?
Why Does Permanent Establishment Matter?
A permanent establishment can affect which country has the right to tax a portion of a company's business profits. Under the general framework reflected in the OECD Model, business profits are ordinarily taxable in the enterprise's home country unless it conducts business in another treaty country through a permanent establishment there.
If a permanent establishment exists, the other country may generally tax profits attributable to that permanent establishment. That can lead to responsibilities such as:
- Corporate income tax analysis
- Local tax registration
- Corporate tax returns
- Calculating profits attributable to the permanent establishment
- Maintaining appropriate financial records
- Transfer pricing analysis
What Can Create Permanent Establishment Risk?
Having a fixed place of business and employees working from another country can create permanent establishment risk.
Having a Fixed Place of Business
The traditional example of permanent establishment is a company maintaining a physical location in another country through which it conducts its business. That can include an office, branch, factory, workshop, or place of management. The IRS similarly describes permanent establishment in the treaty context as generally involving a fixed place of business, such as an office, branch, factory, warehouse, or place of management. Importantly, a company does not necessarily need to own the premises.
Employees Working From Another Country
Remote work has made permanent establishment analysis significantly more important. An employee may live in one country while working for a company located in another. Depending on what that employee does, how frequently they work there, and the applicable tax treaty, their presence can potentially contribute to permanent establishment risk. The OECD updated its Model Tax Convention commentary in 2025 specifically to address cross-border remote work. Under that updated guidance, merely having an employee work from home in another country does not automatically create a permanent establishment. The OECD says the determination depends on the facts and circumstances. The employee's location, working pattern, business activities, and the commercial reasons for their presence can all matter.
Does a Remote Employee Automatically Create Permanent Establishment?
Hiring or having one remote employee in another country does not automatically mean the company has a permanent establishment there. The employee's circumstances must be evaluated. The OECD's 2025 commentary provides additional guidance around employees working from a home or another location across borders. Under that guidance, a home generally would not be considered a place of business of the company where the individual works there for less than 50% of their total working time for that enterprise during the relevant 12-month period, absent unusual circumstances. If the employee works from that location at least 50% of the time, however, the analysis does not automatically change to "permanent establishment." Instead, the facts and circumstances become particularly important. One prominent consideration is whether there is a commercial reason for the employee to perform their work from that particular country.
What is a Dependent Agent Permanent Establishment?
A company can sometimes create a permanent establishment through the activities of a person acting on its behalf even without maintaining a traditional office. This is commonly known as dependent agent permanent establishment, or DAPE. Historically, an important factor has been whether a person acting for the foreign company habitually exercises authority to conclude contracts that bind the company. The IRS identifies contract authority and the activities of employees or agents as important factors when examining potential U.S. permanent establishments. International permanent establishment standards have also evolved beyond simply asking who physically signs the contract.
The OECD's BEPS Action 7 work sought to address arrangements in which a local person substantially negotiates or plays the principal role in generating contracts while the final signature takes place somewhere else. Under the revised approach, a local sales force can potentially create dependent-agent permanent establishment concerns where it habitually plays the principal role leading to contracts that are routinely concluded without material modification by the foreign enterprise. For global employers, that makes an employee's authority and actual behavior especially important.
