Permanent Establishment Risk for Remote Workers and Service Companies

What Is a Permanent Establishment?

A permanent establishment (PE) is a fixed place of business through which the business of an enterprise is wholly or partly carried on. When a foreign enterprise has a PE in another country, that country has the right to tax the profits attributable to the PE. The PE concept is the cornerstone of international corporate tax allocation.

The standard PE definition is set out in Article 5 of the OECD Model Tax Convention. Most countries follow this model in their domestic legislation and bilateral treaties, though with variations. Key provisions:

• Article 5(1): The general rule — a PE is a fixed place of business through which business is wholly or partly carried on
• Article 5(2): A non-exhaustive list of examples: a place of management, a branch, an office, a factory, a workshop, a mine or oil well
• Article 5(3): Construction sites are PEs only if the project lasts more than twelve months
• Article 5(5-6): Agency PE — an agent with authority to conclude contracts on behalf of the enterprise creates a PE; an independent agent does not
• Article 5(4): Preparatory and auxiliary activities (storage, display, delivery) do not constitute a PE

The 2017 update to the OECD Model (implementing BEPS Action 7 changes) tightened the PE rules significantly, particularly around the "preparatory and auxiliary" exceptions and the anti-fragmentation rules.

The Fixed Place of Business Test

The fixed place PE test requires three elements: a place of business (a physical space used by the enterprise), fixedness (some degree of permanence — generally more than 6 months of continuous use), and "at the disposal" of the enterprise (the enterprise has the right to use the space, even if not exclusively).

Home Office PE

The most significant PE risk created by remote working is the home office PE. If an employee of a foreign enterprise works from their home in another country, and that working arrangement has some degree of permanence (not merely temporary or incidental), their home may constitute a "place of business" of the enterprise — and therefore a fixed place PE.

The COVID-19 pandemic accelerated the shift to remote working and prompted many jurisdictions to issue guidance on the PE implications. The OECD issued a secretariat note in April 2020 confirming that temporary working from home due to government health directives should not create PEs. However, that guidance was explicitly time-limited and fact-specific — it does not apply to permanent or structural remote working arrangements post-pandemic.

Country-specific positions on home office PE:

• Germany: The German tax authority (Bundesministerium der Finanzen) confirmed in February 2023 that a home office used regularly and on a permanent basis by an employee of a foreign employer constitutes a PE of the employer in Germany, even if no physical office space is rented
• France: The Direction Générale des Finances Publiques has taken a similar position, though the threshold for "permanence" is interpreted somewhat more narrowly
• Netherlands: The Dutch State Secretary of Finance confirmed in 2021 that a home office creates a PE risk; the Netherlands now includes explicit home office provisions in some of its bilateral tax treaties

Practical Example

An Irish tech company employs three German-resident software developers who work from their homes in Munich on a permanent basis. The Irish company has no German office, no German registration, and pays German payroll taxes for these employees through an Employer of Record arrangement.

Under German domestic law and the Ireland-Germany tax treaty (which follows the 2017 OECD Model), the three home offices in Munich collectively constitute a fixed place PE of the Irish company in Germany. Germany has the right to tax the profits attributable to the activities carried on through that PE — which HMRC would compute as the profits attributable to the employees' activities.

The Agency PE Test

An agency PE arises where a person (the agent) habitually exercises authority in a country to conclude contracts on behalf of a foreign enterprise. Post-2017 OECD Model, the agency PE test was extended to also capture agents who "habitually play the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise."

This extension was designed to prevent MNEs from restructuring their sales forces so that sales staff technically did not "conclude" contracts (leaving that step to headquarters), while in practice doing everything that led to the contract.

A country manager based in France who regularly negotiates and agrees the commercial terms of contracts with French customers, with headquarters merely approving what has been agreed, creates an agency PE in France for the foreign employer.

Independent Agents

An independent agent does not create a PE. The distinction between a dependent and independent agent turns on: the degree of control by the foreign enterprise over the agent's activities, whether the agent bears economic risk independently, and whether the agent acts exclusively or primarily for one enterprise (exclusivity implies dependence).

Service PE

Several countries' domestic tax laws and bilateral treaties include a "service PE" provision: a foreign enterprise that provides services through employees in another country for a period exceeding a threshold (commonly 183 days in any 12-month period) has a PE in that country, even without a physical fixed place of business.

The service PE concept is not in the standard OECD Model (which was not updated to include it), but it appears in many UN Model-based treaties, particularly those involving developing countries. India's treaties with many countries include service PE provisions, which is a significant planning consideration for service businesses with Indian operations.

Construction PE

Under Article 5(3) of the OECD Model, a building site or construction project constitutes a PE only if it lasts more than twelve months. Many bilateral treaties use shorter periods (6 months in some treaties). The twelve-month period begins when work starts on the site and ends when it is completed or abandoned.

BEPS Action 7 introduced anti-fragmentation rules to prevent the 12-month threshold from being avoided by splitting a project into multiple contracts with the same party. Where contracts are part of a single project economically, the periods are aggregated.

Planning Through Arm's Length Service Agreements

Where a group genuinely wants employees in multiple countries without triggering PE for the parent entity, one approach is to structure local operations through a local subsidiary or an employer of record (EOR) arrangement. The local entity (subsidiary or EOR) is paid for its services on an arm's length basis — typically cost plus a mark-up — by the foreign parent. The local entity pays corporate tax on its mark-up profit. The parent entity is not present in the local country through a PE.

This structure works where the local employees genuinely perform services for the local entity, and the local entity independently bears the commercial risk of its activities. If the local entity is merely a cost centre with no independent commercial existence — and the employees are economically acting as employees of the parent — HMRC and foreign authorities may look through the structure and assert PE treatment.

PE Type	Trigger	Common Scenarios
Fixed place	Permanent physical presence	Home offices, rented desk space
Agency	Habitually concludes contracts	Country managers, sales staff
Service	Services for 183+ days	Consulting, IT services with on-site staff
Construction	Building/installation project > 12 months	Infrastructure projects

HPT Group advises corporate clients on PE exposure analysis, particularly for businesses with distributed workforces across multiple jurisdictions. With remote working now a structural rather than temporary feature of many businesses, PE risk is one of the most commonly overlooked international tax issues for growing companies. For a PE risk review of your group structure, contact our corporate advisory team or apply for an assessment.