The most effective way to reduce permanent establishment risk is to control the facts that create a taxable presence. The OECD's 2025 update gives further guidance on cross-border remote work, but the result still depends on the facts of each case. A 183-day threshold is not a universal PE safe harbour.

In practice:

  1. Do not give the foreign business a fixed place of business that it regularly uses.
  2. Prevent local employees, contractors or agents from habitually binding the foreign company or negotiating essential contract terms.
  3. Monitor remote working, customer-site work, construction projects and service delivery against the applicable treaty.
  4. Do not rely on labels, such as calling a core business activity "preparatory" or "auxiliary."
  5. Keep evidence showing where people work, who controls premises, who negotiates contracts and how local activities support the business.

Permanent establishment, or PE, is usually assessed under Article 5 of the applicable tax treaty. The main routes are a fixed place of business, a dependent agent, a construction or service presence, or anti-fragmentation rules that combine activities performed by related entities. Domestic law may also affect the result.

Permanent Establishment Risk at a Glance

Risk area Practical control Evidence to retain
Fixed place of business Avoid premises that the foreign company controls or regularly uses for core business activities Lease terms, office policies, workspace arrangements
Home office or remote worker Review cross-border working patterns, the employee's role, location and commercial reason for being there Travel logs, work-location records, remote-work approvals
Local agent or employee Remove authority to conclude contracts or negotiate their essential terms Delegation matrix, approval records, contract workflow
Independent distributor or agent Confirm legal and economic independence Agency agreement, customer base, pricing and risk records
Construction or service project Track time, personnel, customers and related projects by country Project calendars, timesheets, contracts
Preparatory or auxiliary exception Confirm that local activities support the business rather than perform a core revenue function Functional analysis, organisation charts
Related entities Review activities together instead of analysing each company in isolation Group operating model, intercompany agreements

What Creates a Permanent Establishment?

A PE generally exists where a business carries on all or part of its activities through a sufficiently fixed place of business in another country. Typical examples include a branch, office, factory, warehouse or place of management. A PE can also arise through a dependent agent even where the foreign company has no formal office in the country.

A PE analysis is separate from other local obligations. The IRS, for example, states that a foreign company can be engaged in a U.S. trade or business under domestic law even where the narrower treaty test for a U.S. PE is not met. Payroll tax, employment law, VAT or sales tax, withholding tax and corporate registration may therefore remain relevant.

1. Review the Relevant Treaty Before Changing the Operating Model

Do not apply a generic "183-day rule" to PE risk. The 183-day threshold commonly appears in treaty rules for employment income, but it is not a universal PE safe harbour. Treaties may use different tests for fixed places, dependent agents, construction sites, services and individual employees. IRS treaty guidance shows that the applicable thresholds and conditions differ between countries.

For each country where the business has people, customers, contractors or projects:

  1. Identify the applicable income tax treaty.
  2. Read Article 5, which normally defines PE.
  3. Review the business profits article.
  4. Check for dependent-agent, service-PE and construction-site provisions.
  5. Check whether the treaty has been modified by the OECD BEPS Multilateral Instrument.
  6. Review domestic tax law separately.
  7. Confirm how profits would be attributed if a PE exists.

The Multilateral Instrument can modify treaty provisions dealing with specific-activity exceptions and anti-fragmentation. A conclusion based only on the original bilateral treaty may therefore be incomplete.

2. Prevent a Foreign Office or Workspace From Becoming a Fixed Place of Business

A company should avoid giving the foreign enterprise a location that is regularly available and used to conduct its core business. Risk factors include:

  • A dedicated office or desk assigned to the foreign company.
  • Signage, local business stationery or a local business address.
  • Employees regularly working from premises controlled or paid for by the foreign company.
  • Local premises used to manage sales, deliver services, negotiate contracts or make operational decisions.
  • A warehouse that performs an essential part of the company's distribution business.
  • A customer's premises being used as a regular operating location for the foreign enterprise.

A "no office" clause does not resolve the issue if the actual conduct shows that the business regularly operates through the location. PE analysis is based on the facts and circumstances, including how the premises are used in practice.

Better Controls for Offices and Coworking Spaces

Use controls that match the way the business operates:

  • Avoid exclusive or long-term access for the foreign entity.
  • Do not designate a local address as the foreign company's operational office.
  • Do not require employees to work from a particular foreign location unless the tax consequences have been assessed.
  • Keep core management, contracting and operational decision-making outside the country where possible.
  • Use ordinary business facilities only where the foreign company does not control the space in practice.
  • Reassess any location used repeatedly by the same employees or team.

These controls reduce risk, but they do not create an automatic exemption. A coworking space, customer site or employee's home can still be relevant if the overall facts show that the foreign enterprise conducts business through it.

3. Manage Cross-Border Remote Workers and Home Offices

Remote work can create PE risk when an employee's home or another location becomes a place through which the foreign company carries on its business.

The OECD's 2025 update to the Model Tax Convention provides more detailed guidance. Under that commentary, a home or other relevant place would generally not be treated as the enterprise's place of business where the individual works there for less than 50% of total working time over a relevant 12-month period, unless other facts indicate otherwise. At 50% or more, the result depends on the facts and circumstances. The commercial reason for the individual's presence in that country is particularly important. This is guidance, not a universal statutory safe harbour.

The OECD examples show the difference:

  • An employee working 30% of the time from a home in another country would generally not create a fixed-place PE without other risk factors.
  • An employee working 80% from a home while providing services to customers in that country presents materially higher risk because there is a commercial reason for the employee's presence.
  • An employee working 60% from a home but serving customers remotely in other countries may not create a PE if there is no commercial reason for the employee to be located in the home country.

Remote-Work Controls

A practical remote-work policy should:

  • Require pre-approval for working from another country.
  • Record the employee's actual work location and working days.
  • Distinguish personal convenience from a business requirement.
  • Restrict customer-facing, sales and contract-negotiation roles in higher-risk countries.
  • Confirm whether the employer provides an office in the employee's normal work country.
  • Review employees who spend at least half of their working time abroad.
  • Reassess arrangements that continue beyond a short temporary period.

The employee's job description should match what the employee does in practice. A contract stating that an employee has no sales authority will not be persuasive if the employee routinely negotiates commercial terms or secures customer commitments.

4. Remove Dependent-Agent Risk

A foreign company can create a PE through a dependent agent even when it has no local office. The risk is highest where a person in the country habitually concludes contracts, effectively negotiates their essential elements or performs the central sales function for the foreign enterprise. The person may be an employee, contractor or separate company.

The safest operating model is to ensure that local personnel:

  • Do not have authority to bind the foreign company.
  • Do not habitually negotiate the essential terms of customer contracts.
  • Do not operate a sales process where approval outside the country is only automatic.
  • Do not present themselves as the local contracting office of the foreign enterprise.
  • Escalate pricing, liability, scope and other material terms to an active decision-maker outside the country.
  • Perform support or market-development functions that accurately reflect their role.

The place where a contract is formally signed is not always decisive. The U.S. Model commentary explains that the analysis may apply where an agent effectively concludes contracts that bind the enterprise, even if another person signs the contract or it is signed in another country.

Can an Independent Agent Avoid PE?

A genuine independent agent may avoid dependent-agent PE treatment, but the agent must be both legally and economically independent and act in the ordinary course of its own business. Relevant considerations include the agent's instructions, business risk, exclusivity and degree of integration with the foreign enterprise.

Do not assume that calling a sales company an "independent distributor" is enough. Review:

  • Whether the agent has multiple customers.
  • Whether the agent bears its own commercial risk.
  • Whether the agent controls how it conducts its business.
  • Whether the foreign company provides detailed operational instructions.
  • Whether the agent is economically dependent on one principal.
  • Whether the agent performs functions that are central to the foreign company's business.

Commissionaire arrangements and similar structures also require care. OECD BEPS Action 7 was designed to address arrangements that artificially avoid PE status where a local intermediary regularly generates contracts for a foreign enterprise.

5. Use the Preparatory and Auxiliary Exception Carefully

Many treaties exclude specific activities from PE treatment when they are genuinely preparatory or auxiliary. The exception is not a general protection for every limited local activity.

An activity is less likely to qualify where it forms an essential and significant part of the enterprise's business. For example, a warehouse that stores and delivers goods sold to local customers may perform a core distribution function rather than provide storage only.

The exception is stronger for activities such as:

  • Gathering information.
  • Market research.
  • Advertising support.
  • Limited purchasing support.
  • Holding stock for another enterprise where the treaty conditions are satisfied.
  • Administrative functions that do not form part of the company's core revenue-generating activity.

It is weaker where the local operation:

  • Takes and fulfils customer orders.
  • Delivers the main service.
  • Maintains stock for rapid customer delivery.
  • Provides customer support that is integral to the product.
  • Performs the company's main sales, distribution or production activity.

Related companies cannot always avoid PE by dividing a cohesive business into several smaller activities. Anti-fragmentation rules can combine complementary activities performed by the same enterprise or closely related enterprises where the combined operation is not preparatory or auxiliary.

6. Monitor Construction, Services and Employee Travel

Construction sites, installation projects and service delivery can trigger treaty-specific PE rules. Some agreements include project-duration tests, with examples of six- or twelve-month thresholds, while service PE provisions may use separate tests. The relevant period and aggregation rules must be checked in the specific treaty.

Businesses should maintain a country-by-country record of:

  • Employee and contractor workdays.
  • Project start and end dates.
  • Customer locations.
  • Installation, supervision and maintenance activities.
  • Related or consecutive projects.
  • The people responsible for contract negotiation.
  • Whether activities are performed for one customer or multiple customers.

Do not wait until a project approaches a treaty threshold. A project can create wider tax and compliance obligations once the PE analysis changes, including profit attribution, registration, tax returns and record-keeping.

7. Do Not Treat a Local Subsidiary as an Automatic Shield

A foreign company does not generally create a PE merely because it controls or owns a subsidiary in another country. The subsidiary can become relevant, however, if it conducts the foreign parent's business as a dependent agent or otherwise operates as the parent's local business presence.

Review whether the subsidiary:

  • Signs or negotiates contracts for the parent.
  • Uses the parent's branding and commercial systems.
  • Performs the parent's core business rather than its own limited functions.
  • Is economically dependent on the parent.
  • Has employees who routinely act on behalf of the parent.
  • Has separate decision-making and commercial risk.

Intercompany agreements should reflect the real operating model. They should not describe a limited service arrangement while local personnel perform the parent company's main revenue-generating activities.

8. Build a Permanent Establishment Risk-Control Process

A PE policy should operate as a continuing control, not a one-time tax memo. At minimum, maintain:

  • A country risk register.
  • An employee travel and work-location approval process.
  • A contract-authority matrix.
  • A list of offices, coworking spaces, warehouses and customer sites.
  • Project and service-day tracking.
  • A register of local agents, distributors and contractors.
  • Annual treaty reviews.
  • Evidence supporting the group's functional analysis.
  • Escalation procedures for new hires, sales roles, remote workers and foreign projects.

The most useful evidence is usually created at the time events occur. Keep records showing who made commercial decisions, where employees worked, who controlled the premises, how contracts were approved and what each local entity did.

What Not to Rely On

Avoid these common but weak arguments:

  • "The employee stayed fewer than 183 days, so there is no PE."
  • "The contract was signed by headquarters, so the local salesperson cannot create a PE."
  • "The local company is a separate legal entity, so the parent has no presence."
  • "The office is a coworking space, so it cannot be a fixed place."
  • "The agreement says the activity is preparatory, so the exception applies."
  • "The employee chose the home office personally, so the company has no connection to it."
  • "The website is local, but websites never create PE risk."

These may be relevant facts, but none replaces a treaty-specific analysis of how the business operates in practice. HMRC, for example, states that a website alone does not establish a UK fixed place or dependent agent. It also confirms that a subsidiary may become relevant where it carries on the foreign parent's business as a dependent agent.

If a Permanent Establishment May Already Exist

Do not change the contracts and assume that historic risk has disappeared. First, document the actual facts for each relevant period. Then:

  1. Review the treaty and domestic law.
  2. Identify the date the risk may have started.
  3. Determine the activities and profits attributable to the local presence.
  4. Check registration and filing requirements.
  5. Consider voluntary disclosure or corrective filings where appropriate.
  6. Redesign the operating model prospectively.
  7. Obtain country-specific advice before implementing changes.

A strong PE risk strategy is operational rather than cosmetic. Control where business is conducted, restrict local contracting authority, monitor remote work and projects, avoid dividing core functions between related entities, and keep evidence showing that the legal structure matches the commercial reality.