Permanent establishment: what it is, and when staff abroad create one

What a permanent establishment is

Most tax treaties follow the OECD Model Tax Convention. Under a treaty, a company pays tax on its business profits only in its home country. The exception is a permanent establishment (PE) in the other country.

A fixed place of business

A permanent establishment is a fixed place of business through which the business of a company is wholly or partly carried on (Article 5, paragraph 1).OECD Model Tax Convention, condensed version 2017, Articles 5 and 7Checked 6 Oct 2026

Examples

A place of management, a branch, an office, a factory, a workshop and a mine or other place of extraction (Article 5, paragraph 2).OECD Model Tax Convention, condensed version 2017, Articles 5 and 7Checked 6 Oct 2026

Building sites

A building site or a construction or installation project counts only if it lasts more than 12 months (Article 5, paragraph 3).OECD Model Tax Convention, condensed version 2017, Articles 5 and 7Checked 6 Oct 2026

Support activities do not count

A place used only for activities of a preparatory or auxiliary character is not a permanent establishment, such as storage or the collection of information (Article 5, paragraph 4).OECD Model Tax Convention, condensed version 2017, Articles 5 and 7Checked 6 Oct 2026

An agent can create one

A person who acts for the company and habitually concludes contracts, or habitually plays the principal role that leads to them, can create a permanent establishment without any office (Article 5, paragraph 5).OECD Model Tax Convention, condensed version 2017, Articles 5 and 7Checked 6 Oct 2026

Independent agents

An independent agent who acts in the ordinary course of its own business does not create one. A person who acts only, or almost only, for closely related companies is not independent (Article 5, paragraph 6).OECD Model Tax Convention, condensed version 2017, Articles 5 and 7Checked 6 Oct 2026

What happens when you have one

The other country can tax the profits that belong to the permanent establishment. These are the profits that it might be expected to make as a separate and independent business (Article 7).

Each country's own law then sets how the company registers, files and pays that tax. The treaty only limits what the country can tax.

Sources: OECD Model Tax Convention, condensed version 2017, Articles 5 and 7Checked 6 Oct 2026

Staff who work from a home abroad

In November 2025, the OECD added guidance on homes and other places where a person works for a company abroad, such as a holiday rental. The OECD says that this guidance also applies to existing treaties, because it explains how to read Article 5, paragraph 1.

Less than 50% of working time

A home abroad is generally not a place of business of the company if the person works there for less than 50% of their total working time for the company, over any 12-month period that starts or ends in the tax year.OECD, the 2025 Update to the Model Tax Convention, Commentary on Article 5, paragraphs 44.1 to 44.21Checked 6 Oct 2026

50% or more

The facts decide. The main question is whether the company has a commercial reason for the work to take place in that country.OECD, the 2025 Update to the Model Tax Convention, Commentary on Article 5, paragraphs 44.1 to 44.21Checked 6 Oct 2026

A commercial reason

There is a commercial reason when the person's presence in the country itself helps the business, for example because the person deals directly with customers, suppliers or associated companies there.OECD, the 2025 Update to the Model Tax Convention, Commentary on Article 5, paragraphs 44.1 to 44.21Checked 6 Oct 2026

Not a commercial reason

Letting a person work from home abroad only to hire or keep that person, or only to save office costs, is not a commercial reason. Customers in the country, or a different time zone, are not enough on their own.OECD, the 2025 Update to the Model Tax Convention, Commentary on Article 5, paragraphs 44.1 to 44.21Checked 6 Oct 2026

Occasional contact

Short visits to a customer, or contact that is minor in the whole business relationship, do not make a commercial reason.OECD, the 2025 Update to the Model Tax Convention, Commentary on Article 5, paragraphs 44.1 to 44.21Checked 6 Oct 2026

One-person businesses

Different rules apply when one person runs most of the business from their home. Then the home office is a place of business.OECD, the 2025 Update to the Model Tax Convention, Commentary on Article 5, paragraphs 44.1 to 44.21Checked 6 Oct 2026

The OECD gives these examples of a commercial reason, when the work in the country makes them possible:

• Meetings with customers.
• Building a new customer base, or finding business opportunities.
• Finding or managing suppliers and their contracts.
• Real-time contact with customers or suppliers in other time zones, such as call centre or IT support.
• Regular work with local experts, such as a university that does research for the business.
• Services that need a person on site, such as training or repairs at the customer's premises.
• Work with other staff of the company or of associated companies.

Sources: OECD, the 2025 Update to the Model Tax Convention, Commentary on Article 5, paragraphs 44.1 to 44.21, OECD, Home and away (blog, 26 May 2026)Checked 6 Oct 2026

What an employer of record changes

An employer of record (EOR) is the legal employer of the person, and it runs the payroll in its own name. Your company needs no branch, office or company in the country. Read how an employer of record works.

The tests above still look at what the person does for your company, and from where. A person who habitually concludes contracts for your company can create a permanent establishment, whoever employs that person.

So an EOR suits staff in roles such as engineering, support or operations. For sales staff who close deals, ask a tax adviser before you hire.

Sources: OECD Model Tax Convention, condensed version 2017, Articles 5 and 7Checked 6 Oct 2026

How to lower the risk

1. Count the working timeRecord where each person works. Under 50% of working time from a home abroad over 12 months is generally not a place of business.
2. Check what each person doesCustomer meetings, sales and work with suppliers in the country can be a commercial reason.
3. Keep contract signing at homeStaff abroad should not habitually conclude contracts for your company, or play the principal role that leads to them.
4. Read the tax treatyThe treaty between the two countries decides. Its wording can differ from the latest OECD Model.
5. Ask a tax adviserCheck the plan with a tax adviser in both countries before you hire.

Sources: OECD Model Tax Convention, condensed version 2017, Articles 5 and 7, OECD, the 2025 Update to the Model Tax Convention, Commentary on Article 5, paragraphs 44.1 to 44.21, OECD, Home and away (blog, 26 May 2026)Checked 6 Oct 2026