Permanent establishment (PE) is the threshold concept in international tax law that determines when a foreign company's activities in a country are sufficient to create a taxable presence there. Under Article 5 of the OECD Model Convention, a PE arises when a foreign enterprise has a fixed place of business, such as an office, branch, or workshop, through which it carries on business wholly or partly.
Remote work arrangements have introduced a heightened PE risk. When an employee works from home in a country where the employer has no registered entity, their home office may constitute a fixed place of business if it is used on a sustained basis and the employer derives commercial benefit from it. A dependent agent PE can also arise if the employee habitually concludes contracts in the name of the foreign employer. Tax authorities in several EU member states have increased scrutiny of such arrangements since 2022.
Employers deploying staff to work remotely across borders should obtain a formal PE analysis before the arrangement begins. Where PE risk exists, options include establishing a local entity, using an employer-of-record structure, or limiting the scope and duration of the arrangement.