Permanent Establishment (PE)

Permanent Establishment (PE) is a tax law concept that determines when a foreign company must pay corporate taxes in a country where it has economic activity but no registered legal entity.

Under the OECD 2025 Model Tax Convention, PE is established through three primary triggers:

The 50% Rule (OECD 2025 Update)

Beyond day-counting, OECD 2025 introduced a time-proportion test: if a worker spends more than 50% of their working time at a fixed location in a country, that location may constitute PE regardless of total days elapsed.

Financial Consequences of PE

Once PE is established, the company faces:

• Corporate income tax on profits attributed to that country (rates: 25–35% depending on jurisdiction)
• VAT/GST registration requirements
• Local accounting and filing obligations
• Retroactive assessment risk (typically 3–5 years back)

How to Eliminate PE Risk

The only structural solution is an Employer of Record (EOR). When the EOR is the legal employer, the US company has no local presence — only a service agreement with the EOR entity. No fixed place. No dependent agent. No PE.

Source: OECD Model Tax Convention on Income and Capital, 2025 Update, Article 5.