Permanent establishment
Reviewed by A fixed place of business through which a company operates in another country, giving that country the right to tax the profits attributable to it.
A permanent establishment (PE) is a concept of international tax law: a fixed place of business through which an enterprise carries on its business, wholly or partly, in another country. Typical examples are an office, a branch, a plant, a workshop or a site of resource extraction; a construction site becomes a permanent establishment once it exceeds the duration set by the applicable treaty.
Beyond a fixed place, a PE can also arise through a dependent agent — a person who habitually concludes contracts on the company's behalf or plays the principal role in bringing them about. Auxiliary and preparatory activities such as storing goods, collecting information or advertising normally do not create one. Once a PE is recognised, the country may tax the profits attributable to it, and the company must register and file returns there.
For an investor relocating under a residence or citizenship programme, the exposure lies elsewhere: running a foreign company from the new country of residence can create a permanent establishment there, or move the company's place of effective management, bringing part or all of its profit into the new country's tax base. The tests and exemptions are set by national law and by the wording of the applicable treaty. This material is for reference and is not tax advice.
| What it is | A fixed place of business in another country that creates tax obligations there |
| Who it matters to | Business owners and directors who change their country of residence |
| Where it applies | In national tax law and in double taxation treaties |
| Not to be confused with | A subsidiary, and the tax residency of the company itself |
| Role in investment migration | A central tax risk when a foreign business is run from the new country of residence |
How it works in practice
- Before the move, it is mapped out who takes management decisions, where, and who signs contracts and negotiates with clients.
- The treaty between the two countries is checked: the definition of a PE and the list of exclusions differ from treaty to treaty.
- Roles are separated: if deals are concluded by a team in the former country, this is fixed in powers of attorney and internal procedures.
- Alternatives are weighed — a separate company in the new country, an intra-group service agreement on arm's length terms, or registering a branch.
- Where a PE is recognised, the company registers for tax, keeps separate records of the profit attributable to it and files returns in the country of presence.
Common pitfalls
- ! Assuming that registering a company abroad settles the local tax question: what matters is where business and management actually take place, not the registry address.
- ! An owner-director relocating without revisiting corporate governance — the most common trigger for a dispute over the place of effective management.
- ! A nominee director in the country of registration while management happens elsewhere: this is the first arrangement to be challenged.
- ! Underestimating compliance: even with modest profit, a recognised PE brings registration, separate accounting and filing obligations.
FAQ
Can running a company remotely create a permanent establishment?
The risk exists: if management and commercial decisions are in fact taken, or contracts concluded, from the country of residence, a tax authority may see the marks of a PE or of a place of management; the assessment turns on the facts and the applicable treaty.
Does buying property under an investment programme create a permanent establishment?
Generally no: holding property and the income from it are governed by separate rules, whereas a PE relates to carrying on business activity through a fixed place.
How does a permanent establishment differ from a subsidiary?
A subsidiary is a separate legal entity with its own tax status, while a PE remains part of the foreign company, with the country of presence taxing the profit attributable to it.
Does a home office count as a fixed place of business?
It can, if it is used systematically for the company's business and is at the company's disposal; occasional work there does not usually lead to that conclusion.
How can the risk be reduced when relocating?
By separating functions and authorities in advance, documenting where decisions are taken and contracts signed, and reviewing the structure with advisers in both countries before the move.