You don’t need to open an office – just working with clients or hiring abroad can be enough. The real risk lies in triggering PE unintentionally and failing to meet local tax obligations.
This article explains when permanent establishment risk arises, how it affects your tax obligations in a foreign country, and what you can do to avoid unexpected PE risk and tax liabilities while staying compliant.
What is a permanent establishment, and why it’s a risk?
A permanent establishment refers to a tax concept that applies when your business has a strong enough presence in a foreign country to be taxed there.
You don’t need to open a branch or register a local entity – just conducting business abroad can be enough. Local tax authorities might consider your business a taxable presence and expect you to pay corporate tax.
This happens more often today, especially with the complexities of remote work and managing global teams. A single employee working remotely, or a sales agent repeatedly visiting clients, can trigger permanent establishment risk.
At its core, PE risk is about the mismatch between your business operations and what tax administration expects under local tax laws.
Why permanent establishment risk matters for global expansion
If your business crosses borders, you should take permanent establishment risk seriously. Ignoring it can lead to more than just a tax bill:
- You could owe corporate tax abroad. If local authorities see your company as active, they may tax profits earned there.
- You may need to follow local tax laws and labor laws. This includes social security payments, employee benefits, or compliance with employment standards.
- You might be required to register. Revenue authorities in a foreign country could expect you to officially register under their tax laws.
- You risk being taxed twice. The same income might be taxed in both your home and the host country. Tax treaties help avoid this, but only if used properly.
Staying ahead of permanent establishment risk pays off
Addressing PE risk early helps you:
- avoid surprise costs from taxes and penalties,
- show local authorities you’re playing fair,
- find better ways to manage tax obligations,
- support your global workforce with clear structures.
Permanent establishment risk for fully remote companies
Even remote-first teams face establishment risk. One remote worker might not be an issue, but if they manage clients, lead projects, or sign contracts, they could trigger a taxable presence.
Red flags for foreign tax office include:
- remote workers with decision-making power,
- using local addresses for business,
- managing business activities or clients abroad,
- hosting digital infrastructure that earns local taxable revenue.
Expanding your remote team? Explore Useme’s freelancer base and find an expert in your niche.
The main types of permanent establishment
A permanent establishment isn’t one-size-fits-all. Depending on how your business operates internationally, you might fall under one of several types. Here are the most common:
Physical presence (fixed place of business operations)
This is the classic case – your company has a physical location in another country where it runs part of its business. That location may be classified as a fixed place under local tax rules, even if it’s shared or used part-time. It could be an office, a production site, a warehouse, or even a consistent shared coworking space.
Example: A Canadian architecture firm opens a small studio in Mexico to work on local projects. That studio creates a PE, and the firm is taxed on the income tied to its work there.
Dependent agents working on your behalf
You don’t need your own space to trigger PE. If someone regularly acts on your company’s behalf in another country – especially if they can negotiate or sign deals – you might have an agency permanent establishment.
Example: A U.K. startup hires a freelance rep in Germany to secure clients. The rep attends meetings, handles deals, and closes contracts under the company’s name. That setup could be enough to trigger PE in Germany. Local tax authorities may interpret agency relationships broadly, especially when contracts are signed domestically.
Service-based presence
Providing services in another country – especially over a longer period – can also lead to a PE, even without local offices or staff.
Example: A project management firm from Australia spends several months running workshops for a client in Singapore. If the team stays long enough or the services are seen as significant, they may be taxed locally under service PE rules.
Construction or installation projects
Some countries treat construction or installation work as a permanent establishment if it lasts longer than a set number of months. Each country sets its own time limit – six, nine, or twelve months are common thresholds.
Example: A French energy company installs solar panels in Italy. The project takes ten months, passing the threshold for Italy’s rules. That work may now count as a PE.
Virtual or digital PE
You don’t even need to be physically present to be taxed. Some countries treat digital infrastructure – like servers, platforms, or apps used locally – as a PE, even without a physical office. If your business earns revenue from users in that country, you might be taxed there.
Example: A software company hosts its platform on servers located in Brazil. Local tax authorities consider that setup enough to trigger PE.
What triggers permanent establishment in a foreign country?
A permanent establishment can be triggered by many everyday activities:
- A place you work from regularly – even a home office, if used consistently, might be considered a fixed place of business.
- Spending too much time in one country – authorities may use time thresholds (6, 9, or 12 months) to define PE.
- People closing deals on your behalf – sales reps or agents who negotiate or sign contracts can create an agency permanent establishment.
- Offering services for long periods – repeated or extended service delivery abroad raises PE concerns.
- Hiring local or remote workers – especially if you provide equipment or list their address on documents.
- Running the business from abroad – strategic decisions made in another country may signal a significant presence.
- Digital activity that earns local revenue – local servers or platforms can be considered part of the local economy.
Remote teams and permanent establishment risk
Remote work arrangements often raise permanent establishment concerns. Tax office may assess:
- whether a remote worker’s home office is a fixed location;
- if you’re paying for that office or listing it in documents;
- whether they manage staff and clients or sign contracts.
A shift in operational control from the parent company to the host country increases the establishment risk. Moreover, if you hire independent contractors abroad, in addition to permanent establishment risk, you also face the risk of employee misclassification.
Learn more about hiring freelance contractors from these articles:
- How to fill out Form 1096
- How to hire an independent contractor
- How to pay international contractors
- Freelancer payment methods
What happens if you create a permanent establishment?
Creating a permanent establishment in another country isn’t just about paying more taxes. It can lead to a chain reaction of responsibilities – legal, financial, and reputational – that you might not be ready for if you don’t plan ahead.
Here’s what’s at stake.
You could owe corporate taxes abroad
Once a permanent establishment exists, you’re expected to pay corporate income tax on the profits earned in that country. And if you weren’t aware of the risk, you might end up paying late – along with interest and penalties. In some cases, it’s not just about one tax bill – it’s about long-term tax liabilities piling up over several years.
You might face double taxation
Without proper planning, the same income could get taxed twice – once in your home country, and again where the permanent establishment was triggered. Some countries have treaties that help avoid this, but those only work if you understand how to apply them.
You’ll have new employer obligations
If your permanent establishment includes local workers, you might be on the hook for more than just payroll. You could need to register as a local employer, withhold income tax according to local tax laws, and pay social security contributions.
You could damage your reputation
Paying late or ignoring local rules can quickly turn into a PR issue. Governments don’t like tax avoidance. Neither do regulators. And once trust is broken, it can take a long time – and a lot of paperwork – to fix it.
You might get audited
If tax authorities in a foreign country suspect you’ve created a permanent establishment and haven’t followed the rules, an audit is likely. That means time, stress, and potentially more costs – especially if they find anything you didn’t account for.
It can affect employee mobility
If you’ve triggered a PE, governments may apply immigration rules differently. That could mean visa issues, work permit restrictions, or delays when moving staff across borders.
How to avoid permanent establishment risk
PE risk is manageable if you understand it early and take the right steps. Avoiding permanent establishment risk means growing smart:
✅ Mitigate permanent establishment risk with experts
Local tax professionals can help you understand each country’s rules and avoid unexpected tax obligations.
✅ Think carefully about how you expand
Flexible arrangements may work for small teams. However, with steady revenue or multiple hires, registering a local entity might reduce risk.
✅ Consider using an Employer of Record (EOR)
An EOR can hire employees legally on your behalf, manage compliance, and reduce establishment risk.
✅ Keep key decisions centralized
Avoid giving local teams too much power. Keep financial and strategic decisions at the parent company to reduce tax exposure.
✅ Review tax treaties
Use international tax treaties to avoid being taxed twice. You need to understand and apply them correctly.
✅ Set boundaries around remote work
Control how your team works abroad: don’t pay for home offices or list local addresses. Limit their decision-making authority.
✅ Keep clear records
Track where your team works, for how long, and what they do. This helps prove your business doesn’t have a taxable presence.
✅ Educate your team
Help them understand what triggers PE. A few basic rules can prevent costly mistakes.
Protect your business activities during global hiring
PE risk is easier to prevent than fix. Map where your team operates, review each country’s tax laws, and get professional guidance when needed. With the right setup, you can avoid permanent establishment risk while expanding globally.
Triggers aren’t always clear-cut. Each country defines permanent establishment differently. Many tax authorities use their own interpretations of tax laws and agency relationships. Don’t assume that what’s allowed in one place applies everywhere.
Quick PE risk control questions
Ask yourself:
- Are you earning income from clients in a foreign country?
- Do you have a fixed place of business there – even a coworking space or home office?
- Is someone working in a foreign country and performing substantial business activities for your company?
- Is someone negotiating or signing contracts on your behalf?
- Are you providing services there for an extended period?
- Are you hosting digital infrastructure (like servers or platforms) in that country?
- Are key business decisions made outside your home country?
- Is your company listed with a local address on any documents?
- Are you registered with the tax authorities in a foreign country – or should you be?
- Do you understand the host country’s tax laws and tax treaties?
If you answer yes to several of these, you may be facing permanent establishment risk.
