The investor’s field guide · P
Permanent establishment
A level of activity in a foreign country that lets that country tax the profits connected to it, even without a local branch or subsidiary.
Explained by the editorial team
A permanent establishment, often shortened to PE, is the test tax authorities use to decide whether a company operating across a border has enough of a footprint in a country to be taxed there. It does not require a registered branch or office. Two routes are common: a fixed place of business, such as an office, workshop or site the company uses regularly, and a dependent agent, someone acting for the company who habitually negotiates or signs contracts on its behalf in that country.
How it works
Tax treaties, most following the OECD Model Tax Convention, set out both tests. A short visit, an occasional meeting, or a representative with no authority to bind the company is unlikely to create a PE on its own. A person who regularly closes deals in the company's name is a different matter, even without a desk or a job title that says so. An agent genuinely independent of the company, acting in the ordinary course of their own business for several clients, is usually excluded.
What to examine
Whether a permanent establishment exists is a question of fact, decided under the domestic law of the country concerned and the specific treaty that applies, not by what a contract calls the relationship. The consequence, if one exists, is a local tax bill on the profits attributable to it. Get advice from a tax adviser qualified in the relevant country before a representative's role grows from occasional to habitual.
General information, not investment, legal or tax advice. Examples are illustrative. Read the disclaimer.