Permanent establishment risk is the chance that a company becomes taxable in a country because of the work someone does there. A permanent establishment (PE) is the threshold in tax treaties at which a country may tax a foreign company's business profits. Below it, the company is taxed only at home. Above it, the other country can tax the profits that belong to the activity on its soil.
Remote work makes this question common. An employee who moves abroad and keeps working for the same employer, or a founder who runs a company registered in one country from an apartment in another, can create the facts that tax authorities look for. The company may then face registration, tax filings and tax on part of its profits in a country it never planned to enter.
This guide explains the main PE tests, how they apply to home offices and founders, how PE differs from corporate residence, and what is at stake. It describes general principles; the result in any real case depends on the treaty, local law and the facts.
Key takeaways
- A PE usually needs a fixed place of business with some permanence, or a person who habitually concludes contracts for the company.
- A home office can count as a fixed place of business in some cases, depending on how it is used and whether the company in practice needs it.
- Founders who negotiate and sign deals while living abroad can create a dependent agent PE.
- Separately, a company managed from another country can become tax resident there, which is a bigger exposure than a PE.
- Domestic law can be broader than treaties, and where no treaty applies, domestic law decides alone.
What a permanent establishment is
Most tax treaties follow Article 5 of the OECD Model Tax Convention or the United Nations Model. The core definition has three parts.
A fixed place of business. This is a place through which the company's business is wholly or partly carried on, such as an office, branch or workshop. The place must be at the company's disposal and have a degree of permanence. A place of management is listed as a typical example.
Exceptions for preparatory or auxiliary activities. Activities such as storing goods or collecting information may fall outside the definition if they are only preparatory or auxiliary. Changes made after the OECD's base erosion project in 2015 narrowed these exceptions and added rules to stop companies splitting a single business into small pieces to fit under them.
A dependent agent. A company can have a PE without any fixed place if a person habitually concludes contracts on its behalf, or plays the principal role that leads to contracts being concluded without material changes. Independent agents acting in the ordinary course of their own business are generally excluded.
Time thresholds differ by treaty. Under the OECD Model, a construction site counts as a PE if it lasts more than 12 months. The UN Model adds a services PE, which can arise when staff provide services in a country for more than 183 days in any 12-month period. Many treaties with developing countries include a version of this rule.
Domestic law can go further
Treaties limit a country's taxing rights, but each country also has its own PE definition. Where there is no treaty, domestic law applies alone. Some examples from PwC's 2026 country summaries:
| Country | Domestic PE approach | Notable point |
|---|---|---|
| Germany | Any fixed business facility serving the company's purpose | A permanent representative who habitually acts for the company also counts |
| Spain | Continuous or habitual work facilities, or an agent who regularly concludes contracts | No exemption for preparatory or auxiliary activities in domestic law |
| Estonia | An enterprise through which a non-resident's permanent business activity is carried out | Departs from the OECD wording |
| Singapore | Broader domestic definition | Less relevant at home because Singapore taxes by source, but treaties usually prevail |
The lesson is that the same facts can lead to different answers in different countries. A home office that would not be a PE under a treaty can still raise questions where no treaty applies. See PwC's summary for Spain for an example of a broad domestic rule.
The home office question
A home office is the most common PE question in remote work. Tax authorities and the OECD Commentary generally look at a few points:
- Is the place at the company's disposal? A home is the employee's property, but if the company in practice requires the person to work there, for example because it offers no other office, the home may be treated as available to the company.
- Is the use continuous? Occasional work from a holiday rental is different from years of daily work from the same home.
- What work is done there? Core revenue-generating work, such as selling to local clients or managing the business, weighs more than routine back-office tasks.
- Is it a personal choice? Working from home because the employee chose to live abroad, while an office remains available elsewhere, points the other way.
The OECD added more detail in the 2025 Update to its Model Tax Convention, published on November 19, 2025. According to EY's summary, the new Commentary says a home office is generally not a place of business of the enterprise if the person works there for less than 50% of their total working time over a 12-month period. Above that level, the answer depends on the facts, including whether there is a commercial reason for the work to be done in that country, such as contact with local customers. National tax authorities publish their own positions and do not always follow the Commentary, so no single number of days settles the question in every country.
The dependent agent test for founders and sales staff
The dependent agent test matters most for people who sell. A salesperson who lives abroad and negotiates contracts that head office signs without real changes may meet it. So may a founder-director who agrees deals with local clients from a laptop in the country where they live.
For one-person companies, the founder is often the only person who negotiates, approves and signs everything. If that person lives in a country, the company's main business activity happens there in practice. That fact pattern raises both PE and residence questions.
PE versus corporate residence
A PE makes a company taxable on the profits linked to that presence. Corporate residence goes further: a resident company is usually taxed on its worldwide profits.
Many countries treat a foreign-registered company as resident if it is managed from inside their borders. HMRC's guidance on central management and control says the test looks at where the highest level of control is actually exercised, and that this can be an individual shareholder who has in fact taken over management. Germany treats a company as resident if its place of incorporation or main place of management is in Germany, according to PwC's Germany summary. Singapore looks at where the directors exercise de facto control, including board meetings held by video. Estonia, by contrast, uses incorporation only.
When two countries both claim a company as resident, the treaty decides. Under newer treaty wording, the tax authorities often settle these cases by agreement rather than through a fixed rule. Our guide to tax treaty tie-breaker rules explains the process.
Common scenarios and the questions they raise
| Scenario | PE angle | Residence angle |
|---|---|---|
| Employee moves abroad and works full time from home | Is the home office at the employer's disposal? Does the employee sell or manage? | Usually low, unless the employee is a senior decision maker |
| Founder of a one-person company lives in a high-tax country | Fixed place and dependent agent tests both relevant | High, if all key decisions are made there |
| Nomad moving every few months | Less permanence in any one place, but patterns can still form | Unclear residence for the founder can complicate the company's position |
| Sales lead closes deals in a client's country | Dependent agent risk, or services PE under some treaties | Low |
| Contractors in several countries | Usually lower, if they are truly independent | Low |
These are not conclusions. They show which tests an adviser is likely to look at first.
What happens if a PE exists
If a company has a PE, the host country can tax the profits attributable to it. In practice that can mean:
- Registering the company or a branch with the local tax authority.
- Filing corporate tax returns there and keeping local records.
- Agreeing how much profit belongs to the PE, which often involves transfer pricing analysis.
- Claiming relief at home under the treaty to reduce double taxation.
- Possible interest and penalties if the PE is found years later.
Employment tax and social security are separate questions. An employer can have payroll obligations in a country even where no PE exists, so remote employment usually needs its own review.
How remote workers and companies manage the risk
Companies and individuals often look at the following when they assess their position:
- Where key decisions are made and recorded, and whether board meetings reflect reality.
- Who negotiates and signs contracts, and from where.
- Whether employees abroad have written remote work policies that describe their role.
- How long anyone has spent working in each country, which is also why many people track their days for tax residency.
- Whether the company's structure matches where the founder actually lives, a point covered in where to base an online business.
None of these steps turns a real presence into no presence. They help a company understand and document its position.
Frequently asked questions
Can working from a home office create a permanent establishment?
It can, but it does not always. The answer depends on whether the home is in practice at the company's disposal, how continuously it is used, what work is done there and the wording of the relevant treaty and local law.
Does the 183-day rule decide PE risk?
Not on its own. The 183-day test in many treaties concerns the taxation of an employee's salary, and some treaties use 183 days for a services PE. A fixed place PE can exist with fewer days if the place is used with enough permanence. Our article on the 183-day rule explains its limits.
Is a digital nomad's company safe from PE risk if they keep moving?
Moving reduces permanence in any single place, but it does not remove the question. Patterns of repeated stays, a long-term rental used as a base or the founder's tax residency can still matter. See our guide to tax residency for digital nomads.
Does a PE mean the company is taxed twice?
Not necessarily. Treaties usually require the home country to give relief for tax paid on PE profits, through an exemption or a credit. Mismatches can still happen, and resolving them can take time.
Is a coworking desk a permanent establishment?
A single day at a coworking space is unlikely to be one. A dedicated desk rented for the company over a long period, and used for its core business, can look much more like a fixed place of business.
Important: This article is general information, not tax, legal or financial advice. Rules change often and depend on your personal circumstances. Speak with a qualified professional in each relevant country before you act.