Permanent Establishment: When Can an Overseas Business Become Taxable in Another Country?

Permanent establishment for a foreign company is one of the most important concepts in international taxation. An overseas business can potentially become taxable in another country when its activities there create a sufficient taxable presence under domestic law or an applicable tax treaty.

The most common PE rules focus on a fixed place of business, such as an office, branch or factory, and on certain activities performed through a dependent agent. Construction projects, natural resource activities and increasingly cross border remote working can require additional analysis. The exact result depends on the domestic law of the country involved and the wording of the relevant tax treaty.

This guide explains how PE rules work, when an overseas business may create a taxable presence, how fixed places and dependent agents are assessed, how tax treaties affect the outcome, and what international businesses should review before expanding into another country.

Important: Permanent establishment rules are highly fact specific. The OECD Model Tax Convention is a major international reference, but it is not itself a bilateral tax treaty or domestic law. The applicable country’s legislation and the actual tax treaty between the relevant countries must be reviewed before reaching a conclusion. This article is general educational information, not tax advice.

Quick Answer: When Does a Foreign Company Create a Permanent Establishment?

An overseas business may create a permanent establishment when it conducts business in another country through a sufficiently established presence there.

Under the OECD Model Tax Convention framework, the core PE concept is a fixed place of business through which the business of an enterprise is wholly or partly carried on. The OECD Model specifically identifies places such as a place of management, branch, office, factory and workshop as examples, while also providing rules for construction projects, preparatory or auxiliary activities and dependent agents.

A PE can therefore become relevant when an overseas company has, for example:

1. An office or other business location through which its activities are carried on
2. A branch operating in the country
3. A sufficiently permanent place used by the business
4. A dependent agent who habitually concludes contracts or plays the principal role leading to contracts that the enterprise routinely finalizes
5. Certain construction or installation activities lasting beyond the treaty threshold
6. Other activities covered by a specific domestic law or treaty provision

However, having customers in another country does not automatically create a PE. Nor does merely making occasional visits necessarily create one.

The analysis depends on the actual facts, the country’s domestic rules and, where applicable, the bilateral tax treaty.

What Is a Permanent Establishment?

A permanent establishment is a concept used by countries and tax treaties to determine when a business operating across a border has enough presence in another jurisdiction for that jurisdiction to exercise certain taxing rights over business profits.

The basic OECD definition describes a PE as a fixed place of business through which an enterprise’s business is wholly or partly carried on. Article 5 then provides additional rules dealing with examples of fixed places, construction projects, excluded activities and agents.

This is important because a business can operate internationally without establishing a separate subsidiary.

For example, imagine a company incorporated in Country A that sells products to customers in Country B.

If the company has no meaningful operational presence in Country B, it may not have a PE there under the applicable treaty.

But suppose it establishes an office in Country B where employees regularly perform core sales or management activities.

The tax analysis changes.

The office may potentially constitute a fixed place of business PE, depending on the facts and applicable rules.

Does a Permanent Establishment Mean the Company Becomes Tax Resident?

No.

Permanent establishment and tax residence are different concepts.

A company can remain resident in its original country while also creating a PE in another country.

This distinction is fundamental to international tax planning.

For example:

A company may be incorporated and tax resident in Country A.

It then establishes a qualifying office in Country B.

Country B may obtain taxing rights over profits attributable to the PE even though the company remains resident in Country A.

Tax treaties are designed in part to coordinate these situations and reduce the risk of the same profits being taxed twice.

HMRC explains this distinction in its international tax guidance. For a non resident company operating in the UK through a PE, the UK can impose Corporation Tax on the profits attributable to that UK PE, subject to the interaction between domestic law and any applicable tax treaty.

How Does a Fixed Place of Business Create a PE?

The traditional fixed place test has several important elements.

HMRC’s current guidance identifies three core characteristics:

1. There must be a geographic place of business.
2. The place must have a sufficient degree of permanence.
3. The business of the enterprise must be carried on through that place.

These principles broadly reflect the OECD Model framework.

Let’s examine them individually.

1. Must There Be a Physical Place of Business?

Usually, the fixed place analysis begins with identifying a place through which the business operates.

The place could be:

1. An office
2. A branch
3. A factory
4. A workshop
5. A management location
6. An installation or site
7. Certain machinery or equipment
8. Another identifiable location from which business activities are conducted

The place does not necessarily have to be owned by the overseas company.

HMRC explains that premises belonging to another enterprise can potentially be considered a place of business of the foreign enterprise where space has effectively been made available to that enterprise for carrying on its business. Ownership and exclusive possession are not always decisive.

This creates an important practical lesson:

Not owning the premises does not automatically prevent a PE.

An overseas business should therefore assess how a location is actually being used rather than looking only at lease agreements or property ownership.

2. Does the Place Need to Be Permanent?

The word “permanent” does not mean that a business must operate at the location forever.

The issue is whether the place has a sufficient degree of permanence and is not merely temporary.

HMRC explains that there is no universal number of days after which a place automatically becomes a PE. The duration requirement depends partly on the nature of the activity. A location must have a sufficient degree of permanence, but a short period does not produce an automatic universal result.

This is one reason why statements such as:

“You only create a PE after six months.”

are dangerous.

There is no universal international six month rule for ordinary fixed place PEs.

Different activities can be governed by different treaty provisions.

3. Must the Business Actually Operate Through the Place?

Yes.

A company may have access to a physical location without automatically creating a PE.

The business must be carried on through the location in the relevant way.

HMRC describes this as the business being carried on through the fixed place, normally involving personnel of the enterprise. The personnel can include employees and, depending on circumstances, other people working under the enterprise’s instructions.

This means the analysis is not simply:

“Does the company have a room in the country?”

Instead ask:

“What business activities are actually being performed through that location?”

That question becomes critical when distinguishing a genuine operating presence from a facility used for a limited supporting purpose.

Which Places Are Commonly Associated With a PE?

The OECD Model gives examples including:

1. A place of management
2. A branch
3. An office
4. A factory
5. A workshop
6. Certain locations used for natural resource extraction

These examples are important, but they do not create an automatic PE simply because a location has one of those labels.

The general requirements of the PE definition still matter.

For example, calling a room an “office” does not by itself settle the tax question.

The authorities would still need to consider whether the relevant conditions are satisfied.

Can a Foreign Company’s Office in Another Country Create a PE?

Yes.

An office is one of the clearest examples of a potential fixed place of business.

Consider this example.

A German company sells consulting services throughout Europe.

It opens an office in the UK.

Two employees work from that office throughout the year.

They manage customer projects, negotiate commercial matters and perform core business activities for the German enterprise.

This arrangement requires a UK PE analysis.

The fact that the company did not incorporate a UK subsidiary does not automatically eliminate the possibility of UK taxation.

HMRC specifically identifies an office as a potential fixed place and explains that the relevant question is whether the business is actually carried on through that location.

Can a Branch Create a Permanent Establishment?

Yes.

Branches are specifically identified in the OECD Model as examples of locations that can constitute a PE.

A branch is particularly important because it represents an actual operational extension of the enterprise into another jurisdiction.

However, the tax consequences depend on:

1. Domestic law
2. The applicable tax treaty
3. The branch’s activities
4. Profits attributable to those activities

The existence of a PE does not mean that every dollar of the company’s worldwide profit becomes taxable in the host country.

That is a major misconception.

How Are Profits Taxed After a PE Exists?

A PE generally creates a connection between the enterprise and the host country for taxing relevant business profits.

The next question is:

How much profit is attributable to the PE?

This is a separate analysis.

The OECD’s Article 7 framework deals with business profits, while OECD guidance explains how profits can be attributed to a PE using an analysis based on the functions performed, assets used and risks assumed.

Therefore:

PE existence and profit attribution are two related but separate questions.

For example, a foreign company might have a PE in Country B.

That does not automatically mean Country B taxes the company’s entire global profit.

Instead, the relevant profit attributable to the PE is determined under applicable rules.

HMRC likewise notes that the existence of a UK PE does not itself mean that a significant portion of all company profits becomes taxable in the UK. Attribution depends on the activities and value associated with the PE.

What Is a Dependent Agent PE?

A foreign company does not necessarily need its own office to create a PE.

A dependent agent permanent establishment, often called a DAPE, can arise through certain activities of a person acting on behalf of the foreign enterprise.

This is particularly important for businesses expanding internationally through local sales representatives, agents and related companies.

Historically, treaty rules focused heavily on an agent having and habitually exercising authority to conclude contracts in the name of the enterprise.

Modern treaty rules have developed further.

Under the OECD approach, Article 5 can also cover situations where a person habitually concludes contracts or habitually plays the principal role leading to contracts that the enterprise routinely concludes without material modification.

This change matters because a business should not assume:

“Our local sales representative never signs the final contract, so there cannot be a PE.”

That conclusion may be wrong.

The representative’s role in bringing contracts to conclusion can matter.

What Does “Principal Role Leading to Contracts” Mean?

The modern dependent agent test is concerned with substance rather than simply the location of the signature.

A person may play a principal role where:

1. Their activities directly lead to contracts being concluded.
2. Their activities represent most of the relevant work that results directly in the contracts.
3. The enterprise routinely concludes those contracts without materially changing the commercial terms.

HMRC’s current guidance explains this approach and notes that the activities need to result repeatedly in contract conclusions rather than occurring only in isolated circumstances.

This reflects a broader principle in international tax:

Tax authorities increasingly look at what people actually do, not just what contracts or organizational charts call them.

Can an Independent Agent Create a PE?

Normally, an agent acting independently in the ordinary course of its business is treated differently from a dependent agent.

The OECD framework contains an independent agent exception, subject to the exact treaty wording and relevant facts.

The key issue is whether the agent is genuinely independent.

An overseas company should therefore examine:

1. How the agent operates
2. Whether the agent acts for multiple clients
3. Whether the agent is economically dependent on one enterprise
4. Whether the agent conducts an independent business
5. Whether the agent is closely related to the foreign enterprise
6. How much authority and commercial responsibility the agent actually has

You should not conclude that an agent is independent merely because the contract describes the relationship that way.

What Changed in UK Permanent Establishment Rules in 2026?

The UK provides an important current example of how PE rules are evolving.

For UK chargeable periods beginning on or after 1 January 2026, the UK domestic dependent agent provisions were amended.

The legislation now covers a person who habitually concludes contracts or habitually plays the principal role leading to contracts that the company routinely concludes without material modification, subject to the statutory conditions. The 2026 legislation also introduced changes concerning independent agents and closely related persons.

This is highly relevant to international businesses selling into the UK.

A foreign company should not assume that avoiding a formal local branch automatically removes UK PE risk.

At the same time, UK domestic law and an applicable tax treaty must be analyzed together. HMRC specifically warns that treaty provisions can alter the extent of the UK’s taxing rights over a non resident enterprise.

What Are the Preparatory and Auxiliary Exceptions?

The PE rules contain important exceptions for certain activities that are considered preparatory or auxiliary.

The OECD Model includes examples such as:

1. Storage
2. Display
3. Delivery
4. Maintaining stock for certain limited purposes
5. Purchasing goods or collecting information
6. Certain other activities of a preparatory or auxiliary character

However, the exception is not simply:

“Warehouse equals no PE.”

The actual activities and the relationship between those activities and the enterprise’s wider business matter.

The OECD Model also contains an anti fragmentation rule designed to prevent businesses from splitting what is essentially one business operation into several formally separate activities in order to claim that each individual location is merely auxiliary.

This is particularly important for multinational groups.

Can a Warehouse Create a PE?

Sometimes, but not automatically.

A warehouse used solely for qualifying storage or delivery activities may fall within an applicable exception.

But consider a different arrangement.

An overseas company operates a warehouse where:

1. Inventory is managed strategically.
2. Customer orders are processed.
3. Sales decisions are made.
4. Employees perform core business activities.
5. Goods are customized before delivery.

The analysis becomes more complicated.

The purpose and nature of the activity matter.

A business should therefore avoid applying a blanket rule such as:

“Warehouses never create permanent establishments.”

That statement is too broad.

Can a Home Office Create a Permanent Establishment?

This has become especially important because international businesses increasingly use remote workers.

The OECD’s 2025 Update to the Model Tax Convention specifically clarified the circumstances in which an individual’s home or another relevant location can constitute a place of business for the enterprise.

The updated commentary recognizes that remote working from another country does not automatically create a PE.

Factors can include:

1. How much of the person’s working time is spent there.
2. Whether the company has a commercial reason for the individual to work from that country.
3. Whether the home or location is effectively a place through which the enterprise conducts business.
4. The nature of the activities performed there.

The OECD’s 2026 explanation notes that, under its updated commentary, working from a home abroad for less than half of total working time would generally not, by itself, result in a fixed place of business, while arrangements involving more extensive work still require consideration of whether there is a commercial reason for the business to be carried out from that country.

This is an important development, but it should not be converted into a universal “50 percent rule.”

It is part of OECD treaty commentary and must be considered alongside the actual treaty and domestic law.

Can a Sales Employee Create a Permanent Establishment?

Potentially, yes.

An employee working in another country can create PE questions even when the company does not maintain an office there.

For example:

A U.S. company employs a salesperson who permanently works from the UK.

The salesperson regularly develops customer relationships and plays a major role in contracts that the U.S. company routinely accepts.

This could require analysis under both fixed place and dependent agent principles.

The correct answer depends on the full facts.

The employee’s title is not enough.

What matters is what the person actually does.

Does Having a Local Subsidiary Automatically Create a PE for the Foreign Parent?

No.

A subsidiary is normally a separate legal entity.

Simply owning or controlling a local subsidiary does not automatically mean that the subsidiary is a PE of its foreign parent.

HMRC expressly recognizes this point. A UK resident subsidiary controlled by a foreign company is not a PE of the foreign parent merely because of that relationship. However, the subsidiary’s actual activities can potentially create PE consequences if it also performs the foreign parent’s business in a way that satisfies the applicable dependent agent rules.

This distinction is important for international groups.

Ownership is not the same thing as PE.

Actual functions and activities matter.

Can a Construction Project Create a PE?

Yes, but construction and installation projects often have a specific treaty threshold.

Under the OECD Model Tax Convention, a building site or construction or installation project constitutes a PE when it lasts for more than 12 months under the standard Article 5 formulation.

However, this does not mean that every country’s treaty uses exactly twelve months.

Some bilateral treaties use different thresholds.

Therefore, businesses involved in:

1. Construction
2. Engineering
3. Installation
4. Infrastructure
5. Resource development

should always examine the actual treaty.

Do not assume the OECD Model wording is automatically the law that applies to your company.

How Do Tax Treaties Affect Permanent Establishment?

This is one of the most important parts of PE analysis.

A company may be subject to a country’s domestic tax rules even before you look at the treaty.

The treaty can then restrict the source country’s taxing rights if its conditions are satisfied.

HMRC explains this relationship clearly.

For a resident of a treaty partner country, the applicable treaty generally determines when the UK can tax business profits through a UK PE. HMRC also notes that UK treaty provisions can modify the extent of the UK’s domestic taxing rights.

This produces a practical sequence:

First

Determine what the country’s domestic law says.

Second

Identify the applicable tax treaty.

Third

Examine the treaty’s definition of PE.

Fourth

Determine whether the business has a PE under that treaty.

Fifth

Determine which profits are attributable to the PE.

That is far more reliable than asking only:

“Does the OECD say I have a PE?”

The OECD Model is a framework.

The actual bilateral treaty is what matters for a particular treaty relationship.

Why Does the OECD Model Matter?

The OECD Model Tax Convention is widely used as a basis for negotiating and interpreting bilateral tax treaties.

The OECD describes it as a major reference for governments and taxpayers dealing with international double taxation and cross border investment.

Article 5 provides the principal PE framework.

Article 7 addresses business profits.

Together, these provisions help determine:

1. Whether a taxable business presence exists.
2. Whether the source country can tax relevant business profits.
3. How profits connected with the PE are considered.

But treaties can contain wording that differs from the OECD Model.

That difference can be decisive.

HMRC explicitly warns that not all UK treaties follow the OECD Model exactly and that the specific treaty must therefore be examined.

What Activities Usually Require a PE Risk Review?

A foreign company should consider a formal PE review when it:

1. Opens an overseas office.
2. Establishes a branch.
3. Maintains employees in another country.
4. Allows employees to work remotely from another country.
5. Uses a local sales representative.
6. Uses a related company to negotiate customer contracts.
7. Stores inventory in another country.
8. Operates a construction or installation project.
9. Performs services through people based abroad.
10. Maintains equipment or operational infrastructure abroad.
11. Conducts management activities from another jurisdiction.
12. Uses an overseas location for core revenue generating functions.

This does not mean that every one of these activities creates a PE.

It means they are situations where a detailed review may be appropriate.

Five Real World PE Examples

Example 1: Foreign Company With a Local Office

A Canadian company opens a permanent office in Germany.

Employees regularly conduct core business activities from that office.

PE risk: High enough to require detailed analysis.

The fixed place test should be examined.

Example 2: Foreign Company With Customers But No Local Presence

A UK company sells software to customers in France.

The company has no French office, employees, branch or local agent concluding contracts.

PE risk: The existence of French customers alone does not automatically create a PE.

Other tax obligations may still exist, but customer location alone is not enough to establish a PE.

Example 3: Local Sales Agent

A foreign company appoints a salesperson in another country.

The salesperson regularly performs activities that directly lead to contracts that the company routinely accepts without material modification.

PE risk: Dependent agent analysis may be required.

Example 4: Remote Worker Abroad

An employee works from a home in another country for part of the year.

PE risk: Not automatically a PE.

The time spent, commercial reasons for the arrangement, nature of activities and treaty wording need to be considered. The OECD’s 2025 update specifically addresses these modern working arrangements.

Example 5: Construction Project

A foreign engineering company undertakes a major construction project abroad.

The project lasts beyond the applicable treaty threshold.

PE risk: Potentially significant.

The actual treaty should be checked rather than assuming the OECD Model’s twelve month threshold applies.

Permanent Establishment vs Subsidiary

These concepts are often confused.

A PE is a taxable presence of an existing foreign enterprise.

A subsidiary is generally a separate legal entity incorporated in the host country.

For example:

Foreign company

United Kingdom Ltd

↓

PE

UK company operates a qualifying office abroad

The same legal entity remains the taxpayer.

Or:

Foreign parent

UK Ltd

↓

Subsidiary

Foreign jurisdiction Ltd

The subsidiary is a separate legal entity.

The legal and tax consequences can be very different.

This is why companies should decide their international structure based on commercial, legal and tax considerations rather than assuming that avoiding incorporation automatically means avoiding local tax exposure.

What Happens After a Permanent Establishment Is Identified?

Once a business determines that it has a PE, several practical consequences may follow.

Depending on the jurisdiction, the company may need to consider:

1. Tax registration
2. Corporation tax or income tax filing
3. Accounting records
4. Profit attribution
5. Transfer pricing where related parties are involved
6. Payroll obligations
7. VAT or GST
8. Local reporting
9. Record retention
10. Potential withholding obligations

For example, HMRC states that a non UK resident company trading through a UK dependent agent PE may need to register for Corporation Tax.

A PE is therefore not simply a theoretical tax concept.

It can create real administrative obligations.

How Can an Overseas Business Reduce Unnecessary PE Risk?

The goal should not be to hide genuine business activity.

Instead, the objective should be understanding the rules before creating a structure that produces unexpected tax exposure.

Before entering a new country, businesses should map:

People

Where do directors and employees work?

Premises

Where does the company have offices, facilities or operational space?

Contracts

Where are contracts negotiated and concluded?

Agents

Who represents the business?

Decision making

Where are commercial decisions made?

Functions

What activities are performed locally?

Infrastructure

Where are goods, equipment and systems located?

Time

How long do employees and projects operate locally?

Treaty

What does the actual bilateral tax treaty say?

This exercise can reveal PE risk before the business commits to a costly operating structure.

Permanent Establishment Risk Checklist for Foreign Companies

Before expanding abroad, ask:

1. Does the business have a fixed place of business in the target country?
2. Is the location available to the enterprise?
3. Does it have sufficient permanence?
4. Are core business activities carried on there?
5. Does the company have employees working locally?
6. Are employees working remotely from homes abroad?
7. Does a local person negotiate or conclude contracts?
8. Does an agent play the principal role leading to contracts?
9. Is the agent genuinely independent?
10. Does the business operate a construction or installation project?
11. Are activities merely preparatory or auxiliary?
12. Could the anti fragmentation rules apply?
13. Is there a local subsidiary?
14. Could the subsidiary also perform the foreign parent’s business?
15. What does the applicable tax treaty say?
16. How would profits be attributed if a PE exists?
17. Would local tax registration be required?
18. Are VAT, payroll or other obligations triggered separately?

If several answers point toward local business activity, a professional PE review should be considered before the structure is implemented.

What Is the Biggest PE Mistake Foreign Companies Make?

The biggest mistake is treating PE as a simple physical presence test.

Modern PE analysis is broader.

A foreign company might create tax exposure through:

A place

or

A person

or

A project

or, depending on the treaty and domestic law,

A combination of activities across related locations.

The OECD’s BEPS Action 7 work specifically addressed arrangements designed to avoid PE status, including certain commissionaire arrangements and fragmented activities.

This is why international tax analysis increasingly focuses on economic substance and actual functions, not just formal legal labels.

Frequently Asked Questions

Does selling to customers in another country create a permanent establishment?

Not automatically.

Having foreign customers can create other tax or regulatory issues, but customer location by itself does not necessarily create a PE.

The company needs to consider its actual presence and the applicable domestic and treaty rules.

Does an overseas office always create a PE?

Not automatically, but an office is a classic example of a potential fixed place of business.

The business activities carried on through the office and the other PE conditions must be examined.

Can one employee working abroad create a permanent establishment?

Potentially.

The result depends on the employee’s working arrangement, the location, the activities performed, the degree of permanence and, where relevant, dependent agent rules.

Can a remote worker create a PE?

Potentially, but working from a foreign home does not automatically create a PE.

The OECD’s 2025 update provides additional commentary for cross border remote working arrangements.

Can an independent agent create a PE?

Generally, an agent that genuinely qualifies as independent and acts in the ordinary course of its business is treated differently from a dependent agent. The exact treaty wording and facts matter.

Does a subsidiary automatically become a PE of its foreign parent?

No.

A subsidiary is normally a separate legal entity. However, its actual activities can potentially create PE consequences for its parent under applicable rules.

Does a permanent establishment make the whole foreign company taxable?

Not necessarily.

A PE generally creates taxing rights over profits attributable to that PE, subject to applicable domestic law and treaty rules.

How long can a business operate abroad before creating a PE?

There is no single universal number of days for every type of PE.

Different PE provisions have different tests, and construction projects can have specific treaty thresholds.

Does a warehouse create a permanent establishment?

Not automatically.

Warehouses used solely for certain qualifying activities may fall within an exception, but the full facts and applicable treaty must be reviewed.

Does signing one contract abroad create a PE?

Not necessarily.

Dependent agent rules generally involve habitual activity, and the actual treaty wording matters.

Under modern rules, the analysis can also concern a person’s principal role leading to contracts rather than only formal signature authority.

Final Answer: When Can an Overseas Business Become Taxable in Another Country?

A foreign company can become taxable in another country when its activities create a taxable presence under the country’s domestic law and, where a tax treaty applies, satisfy the treaty’s permanent establishment rules.

The most important PE triggers are:

Fixed place of business

A sufficiently permanent location through which the enterprise carries on business.

Dependent agent

A person whose activities on behalf of the foreign enterprise meet the applicable conditions concerning contracts or the principal role leading to contracts.

Construction and installation projects

Activities that exceed the threshold specified by the applicable treaty or domestic rules.

Other specialized provisions

Certain industries and jurisdictions can have additional PE rules.

The practical lesson is straightforward:

An overseas business does not need to incorporate a local subsidiary before tax exposure can arise.

An office, branch, employee arrangement, agent, construction project or other operational structure can potentially create a taxable presence.

At the same time, not every foreign activity creates a permanent establishment.

This is why PE analysis should never be based on a single rule such as:

“We have no company abroad, so we have no local tax.”

or:

“Our employee works there, so we automatically have a PE.”

Both statements are too simplistic.

The correct approach is to examine:

Domestic law → applicable tax treaty → Article 5 or equivalent PE rules → actual business activities → profit attribution → registration and filing obligations.

For international businesses, PE planning should happen before establishing overseas offices, hiring local teams, appointing sales agents or moving key business functions across borders.

The earlier the business performs that analysis, the easier it is to design a structure that is commercially useful and tax compliant.