A permanent establishment (PE) is the point at which a foreign company's activity in a country becomes taxable there. Under OECD-based treaties it arises through a fixed place of business, a dependent agent, or, where the treaty says so, a construction or service presence that lasts beyond a set period. Once a PE exists, the host country can tax the profits attributable to it as if it were a separate business.
Fixed place of business and the preparatory or auxiliary exception
The basic test is a fixed place of business through which the enterprise's business is wholly or partly carried on. An office, workshop or site used for the company's own business will usually qualify. Activities that are only preparatory or auxiliary, such as storage or purchasing, are excluded, but since the BEPS update the overall activity at the place must itself be preparatory or auxiliary.
The anti-fragmentation rule stops groups splitting a single business across several sites or related companies so that each piece looks auxiliary. Where closely related enterprises carry on complementary functions in the same country as part of one cohesive operation, the exclusions fall away.123
Agents: the post-BEPS dependent agent test
The 2017 OECD Model creates a PE where a person habitually concludes contracts for the enterprise, or habitually plays the principal role leading to contracts that the enterprise routinely concludes without material modification. This targets sales structures in which local staff negotiate everything and head office simply signs. An agent acting exclusively or almost exclusively for closely related companies is unlikely to count as independent.
The test that applies is the one in the treaty, and many treaties predate 2017. The India-UAE treaty, for example, still requires an authority to conclude contracts. Domestic law can move too: the UK aligned its domestic agent test with the OECD wording for periods beginning on or after 1 January 2026.45678
Construction and service PEs
The OECD Model treats a construction or installation project as a PE only if it lasts more than 12 months, but treaties often use shorter periods. The India-UAE treaty uses more than 9 months for building sites and adds a services PE for services furnished for more than 9 months in any twelve-month period. Domestic law may be wider still: the UK's domestic definition has no minimum duration for building sites, although a treaty can narrow it.
Splitting one project into several contracts, for example between related companies, to stay under the threshold is a known abuse; the OECD Commentary and HMRC treat it as a case for denying treaty benefit under the principal purpose test.910111213
Remote staff and digital presence
Hiring employees in a country where the company has no entity is now the most common way PEs arise by accident. A home office used regularly and continuously for the company's business can, depending on the facts, be treated as a fixed place of business, and a remote salesperson who negotiates terms that head office accepts without change can meet the dependent agent test.
The treaty definitions above still apply; there is no separate digital presence test in the OECD Model articles researched here. Some countries apply domestic rules on digital or economic presence, which were outside the scope of this part.14
What a PE triggers: profit attribution under Article 7
Without a PE, business profits are taxable only in the residence country. With one, the host country may tax the profits the PE would be expected to make if it were a distinct and separate enterprise, which in practice means a transfer pricing-style analysis of the functions, assets and risks located there.
A treaty can only relieve tax, not create it; if domestic law does not charge the activity, the treaty does not add a charge.141516
| Test | OECD Model (2017) | India-UAE DTAA |
|---|---|---|
| Fixed place of business | Fixed place through which business is wholly or partly carried on | Fixed place of business (Article 5(1)) |
| Construction or assembly site | More than 12 months | More than 9 months (Article 5(2)(h)) |
| Services | No general service PE in the Model articles | Services for more than 9 months in any twelve-month period (Article 5(2)(i)) |
| Dependent agent | Habitually concludes contracts or plays the principal role | Authority to conclude contracts (Article 5(4)); no MLI change shown |
Decisions to make
- Do people in the host country negotiate terms or close deals, even if contracts are signed elsewhere?47This is the core of the post-BEPS dependent agent test.
- Do any employees work from home in a country where the company has no entity?1Regular use of a home for the company's business can create a fixed place PE on the facts.
- How long will the project last, counting related contracts and related companies?91013Treaty thresholds such as 9 or 12 months are measured on substance, and contract splitting can be challenged.
- Does the relevant treaty contain a service PE clause?11Where it does, extended service delivery can create a PE without any fixed place.
Documents usually needed
- Employment contracts and job descriptions that define and limit authority to negotiate or bind the company
- Sales approval records showing where and by whom contract terms are settled
- Project schedules and contract register, including contracts held by related companies
- Travel and day-count records for staff working in the host country
- Intra-group service agreements for any local service company
Common mistakes
- Splitting a project into several contracts to stay under a time threshold
- Letting local 'marketing' or 'support' staff negotiate final commercial terms
- Assuming there is no PE because the company has no office lease
- Relying on the OECD Model rather than the wording of the specific treaty
- Forgetting that domestic law may be wider than the treaty definition
Questions businesses ask
Can one salesperson create a PE?
Yes, if under the applicable treaty they habitually conclude contracts or play the principal role leading to contracts the company routinely accepts without material change. Under older treaties such as India-UAE, an authority to conclude contracts is still required.47
A UAE company will deliver a 10-month consultancy project in India. Is that a PE?
Potentially. The India-UAE treaty creates a services PE where services continue for more than 9 months within any twelve-month period, and the facts of the project should be checked against that test.11
What this guide does not yet confirm
These points need checking with a qualified local professional before you rely on them.
- Any OECD 2025 Commentary guidance on home-office and cross-border remote working was not confirmed.
- The MLI Articles 12 to 15 (permanent establishment) positions of each of the eight markets were not confirmed.
- UN Model service PE thresholds and India's domestic business connection and significant economic presence rules were not covered in this part.
- The OECD Model full text could not yet be checked; Article 5 points rely on HMRC's guidance quoting the Model.
Sources and review status
Each statement is numbered to the source it was checked against. We use official sources where we can, and each statement says whether it was checked against an official or a secondary source. Sources last checked on 18 October 2026. None of it has been professionally reviewed yet: it is research checked against official and secondary sources by WONE Global, not legal or tax advice.
Under Article 5(1) of the OECD Model a permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on. OECD Model; individual treaties may differ.
HMRC guidance quoting the OECD Model; the OECD full text could not yet be checked.
Under Article 5(4) of the OECD Model a fixed place used only for listed activities, or a combination of them, is not a permanent establishment provided the overall activity is of a preparatory or auxiliary character. OECD Model as updated following BEPS; older treaties may lack the overall preparatory-or-auxiliary condition.
Article 5(4.1) of the OECD Model disapplies the preparatory or auxiliary exclusions where the same or a closely related enterprise carries on complementary business activities in the same state that together form part of a cohesive business operation. Anti-fragmentation rule; applies where the other place is already a PE or the combined activity is not preparatory or auxiliary.
Under the 2017 OECD Model a dependent agent permanent establishment arises where a person habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts routinely concluded without material modification by the enterprise. Contracts in the name of the enterprise, or for the transfer or licensing of its property or the provision of its services. Reflects BEPS Action 7.
HMRC guidance states that a person is usually considered an independent agent unless it acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related. Independent agent exception in Article 5(6)-type wording; the agent must act in the ordinary course of its own business.
HMRC advises checking the wording of the specific treaty, because it may differ from both the OECD Model and domestic law, particularly in treaties agreed before the 2017 update to Article 5.
The India-UAE DTAA dependent agent test still requires an authority to conclude contracts on behalf of the enterprise; the department's synthesised text shows no MLI modification of it. India-UAE DTAA Article 5(4).
For chargeable periods beginning on or after 1 January 2026 the UK domestic agent test in CTA 2010 s1141(1)(b) has been updated to align with the OECD Model 'principal role' wording. UK Corporation Tax domestic definition; before that date the domestic test required the agent to have and habitually exercise authority to do business on behalf of the company.
Under the OECD Model a building site or construction or installation project is a permanent establishment only if it lasts more than 12 months, and many treaties set different durations. OECD Model Article 5(3); the treaty period applies where it differs.
Under the India-UAE DTAA a building site or construction or assembly project is a permanent establishment only where it continues for more than 9 months. India-UAE DTAA Article 5(2)(h).
Under the India-UAE DTAA the furnishing of services, including consultancy services, creates a permanent establishment where the activities continue for periods aggregating more than 9 months within any twelve-month period. India-UAE DTAA Article 5(2)(i).
UK domestic law treats a building site as a permanent establishment with no minimum duration (CTA 2010 s1141(2)(h)); a treaty can narrow this charge but cannot create one. UK Corporation Tax.
The OECD Commentary treats splitting a construction project into separate contracts to stay below the time threshold as a case where treaty benefit may be denied, and HMRC applies the principal purpose test to such arrangements. OECD Commentary Example J (22-month project split into two 11-month contracts, one with a subsidiary).
Under the India-UAE DTAA the business profits of an enterprise of one state are taxable only in that state unless it carries on business in the other state through a permanent establishment there. India-UAE DTAA Article 7(1).
Under Article 7(2) of OECD-based treaties, the profits attributable to a permanent establishment are those it might be expected to make if it were a distinct and separate enterprise. Most UK treaties follow the OECD Model business profits article; treaty attribution rules prevail where they differ from domestic rules.
HMRC guidance states that a treaty can relieve UK tax but cannot create a UK charge where domestic charging provisions impose none. Treaty provisions take precedence over UK domestic law under TIOPA 2010 s2.
Questions on this topic
16 statements on permanent establishment
