What Is a Permanent Establishment (PE)?
A permanent establishment (PE) is a treaty concept denoting a fixed place of business or dependent agent through which a foreign enterprise becomes locally taxable.
Also known as: PE, Taxable Presence.
How Permanent Establishment (PE) works
A permanent establishment (PE) arises when a foreign enterprise carries on its business wholly or partly through a fixed place in another country, or through a person who habitually concludes contracts there on its behalf, and the host country may then tax the business profits attributable to that presence under its domestic law and treaties. UK law, for example, lists a place of management, a branch, an office, a factory, a workshop and a building or construction site as fixed places of business, and treaties based on the OECD Model Convention use comparable wording alongside exceptions for preparatory or auxiliary activities. For agents, the 2017 OECD wording extends the test from authority to conclude contracts to habitually playing the principal role leading to their conclusion, and the UK applies that wording for chargeable periods beginning on or after 1 January 2026. Some treaties add service or construction time thresholds, which differ from one agreement to another. Once a PE exists, profits are attributed to it under the arm's length principle, the enterprise generally registers and files locally, and the home country relieves double taxation through exemption or credit, subject to the applicable treaty, Multilateral Instrument changes and domestic law.
Permanent Establishment (PE) vs Corporate Residence
Unlike corporate residence, which makes a company taxable on worldwide profits where the company is incorporated or effectively managed, a permanent establishment exposes only profits attributable to a local presence to tax in the host state. A company can therefore have a PE in one state while remaining resident in another.
| Permanent Establishment (PE) | Corporate Residence | |
|---|---|---|
| Trigger | Fixed place of business or dependent agent in the host state | Incorporation or place of effective management, depending on national law |
| Tax base | Profits attributable to the PE only | Generally worldwide profits, subject to domestic exemptions |
| Typical remote-founder issue | Staff or founder working from a foreign home office or concluding contracts abroad | Company managed day to day from the founder's country of residence |
Example
Illustrative example: A company incorporated in Country A sells software services, and its sole director lives most of the year in Country B. From a rented flat in Country B, the director negotiates and signs client contracts and runs daily operations. Country B may treat the flat as a fixed place of business at the company's disposal, or the director as a dependent agent, and claim tax on the profits attributable to that activity. Country A would then generally relieve the resulting double taxation under the treaty between both countries, while both tax authorities may also examine whether management exercised in Country B shifts the company's residence altogether. If a PE is confirmed, the company generally registers in Country B, keeps records supporting the attributable profits and files local corporate returns.
Common misconception
Myth: A company has no permanent establishment abroad unless it rents an office or registers a branch there.
Reality: A permanent establishment can arise without any registered branch or office lease, for example through a home office regularly used for the business or a person habitually concluding contracts for the enterprise.
Frequently asked questions
What creates a permanent establishment?
A permanent establishment is generally created by a fixed place of business, such as an office, branch, workshop or construction site, through which the enterprise carries on business, or by a dependent agent habitually concluding contracts for the enterprise, subject to treaty exceptions.
Can working remotely from another country create a PE?
Remote work can create a permanent establishment where a home office is regularly at the enterprise's disposal or the worker habitually concludes contracts; outcomes depend on the treaty, domestic law and the facts, and tax authorities publish differing guidance.
What happens if a company has a PE abroad?
A company with a permanent establishment abroad generally registers and files in the host country, which taxes profits attributable to the permanent establishment under the arm's length principle, while the home country relieves double taxation by exemption or credit.
Has the definition of a permanent establishment changed recently?
The 2017 OECD Model widened the agency permanent establishment test to people habitually playing the principal role leading to contracts; HMRC confirms UK legislation applies that wording for chargeable periods beginning on or after 1 January 2026.
Related terms
- Corporate Residence — Worldwide taxation by residence; most confused concept
- Permanent Establishment Risk — Exposure assessment before a PE is asserted
- Digital Permanent Establishment
Related guides
- Tax treaties and international taxation — Treaty rules defining permanent establishments
- Incorporation options for location-independent entrepreneurs — Company choice and where founders work
- Estonian e-Residency for location-independent entrepreneurs — Remote-run companies face PE questions
Sources
- HMRC International Manual INTM264510 – Dependent agent PE
- legislation.gov.uk – Corporation Tax Act 2010 s.1141
Last verified: 2026-10-09. This entry is general information, not tax or legal advice; rules vary by country and change over time.
