Global employment brings new opportunities and upsides for companies around the world, but it also presents new and different risks. One of these risks is whether a company is unintentionally creating a taxable presence in a country, commonly known as a “permanent establishment” or “PE.”
As workers become increasingly mobile and companies are less restricted by geography, many tax authorities are paying more attention to whether foreign companies are inadvertently establishing a permanent establishment within their jurisdiction. Their goal is to enforce tax laws and prevent companies from evading tax liabilities by using distributed teams.
In this article, we’ll explain permanent establishment risk, the factors global employers control, how an employer of record can support risk mitigation, and what changed when the OECD updated its remote-work guidance in November 2025.
What Is a Permanent Establishment? Types and Examples
Permanent establishment is a tax concept that is important for employers with globally distributed teams to understand. Generally, if a company has a permanent establishment in a particular country, that means the company has a taxable presence there—in other words, it is required to pay local taxes.
The criteria for whether a company has created a permanent establishment in a location varies depending upon the law of the relevant country and applicable tax treaties between countries. Despite these country-specific differences, there are some general principles or criteria that many of these laws or treaties have in common. These include the following tests:
1. Fixed place of business
One of the leading sources of guidance on this topic is the Organisation for Economic Co-operation and Development (OECD), which has developed a model tax convention that many countries have adopted or used to inform their own laws or agreements. The OECD’s model tax convention defines “permanent establishment” as “a fixed place of business through which the business of an enterprise is wholly or partly carried on.” The model convention identifies various activities excluded from this definition, so long as the activity is preparatory or auxiliary to other activities.
Notably, this fixed place of business test identifies three key elements of permanent establishment: (1) a physical presence; (2) that is fixed (not transitory); and (3) that provides a means through which company personnel conduct business.
2. Dependent agent activities
Many authorities (such as the U.S. Internal Revenue Service) may consider the activities of a company’s “dependent agent” when determining whether a foreign company has a PE within the country in question. This test typically focuses on whether the agent has the authority to enter into revenue-generating contracts on the company’s behalf and habitually does so in the relevant country. An agent’s infrequent or sporadic (non-habitual) execution of contracts in the foreign country generally is not enough to create a permanent establishment.
Under the OECD framework, the independent-agent exception may not apply if an agent acts exclusively or almost exclusively for one or more closely related enterprises. A person may also create dependent-agent PE risk by habitually playing the principal role leading to contracts that the enterprise routinely accepts without material change. Formal signing authority is therefore only one part of the analysis. Local law and the applicable treaty may use different tests.
3. Extended provision of services
In some cases, a company’s employee may give rise to a PE finding by providing services in a foreign country for an extended period of time, such as 6 or 12 months. This provision of services test typically requires the company’s employee to be physically present in the foreign country in order for that country’s authorities to find that the company has established a PE.
Home offices and remote work: what changed in 2025
In November 2025, the OECD published its first comprehensive update to the Commentary on Article 5 of the Model Tax Convention since 2017. Much of the update focused on how permanent establishment rules should be applied in a world where employees increasingly work remotely across borders.
If an individual works from a home or similar location for less than 50% of their total working time over any 12-month period, that location generally is not considered a place of business. However, the 50% threshold is a practical benchmark, not an absolute safe harbor.
At 50% or more, the analysis turns to whether the individual's physical presence in that country serves a commercial reason for the enterprise. Exceeding the 50% threshold does not automatically create a permanent establishment. The location must still satisfy permanence and fixed-place requirements, and preparatory or auxiliary activities may remain exempt.
The OECD Commentary provides interpretive guidance rather than binding law. Domestic law and the applicable tax treaty ultimately control in each case. Companies with distributed teams should therefore work with qualified tax professionals when evaluating cross-border working arrangements.
How can an employer of record help mitigate permanent establishment risk?
An employer of record can support a lower-risk global employment structure, but using an EOR does not determine or eliminate a company's permanent establishment exposure.
Oyster or its local employing entity hires the worker, administers payroll, handles required employment withholding and documentation, and supports compliance with local employment requirements. This allows companies to employ talent internationally without establishing their own local employment entity.
However, tax authorities may also consider the substance of the customer's business activities. The customer controls why a role is located in a country, what the worker does, who directs their work, and what authority the worker holds. Local offices, sales activity, contracting authority, management responsibilities, and other business activities can therefore affect PE risk independently of the employment structure.
Companies should pay particular attention when a worker negotiates material contract terms, signs or effectively closes contracts, sets pricing or discounts, leads a local market, manages senior personnel, controls a local budget, works from company-controlled premises, or performs core revenue-generating activities.
These factors also illustrate why headcount or time spent in a country should not be considered in isolation. The duties and authority of an individual employee may materially affect a company's PE exposure.
Companies using an EOR should treat it as one part of a broader PE risk-management framework and reassess their exposure when an employee's duties, authority, location, or the company's business activities in a country change.
What are the consequences of creating a permanent establishment?
There are a variety of negative consequences that can result from your company inadvertently creating a PE in a foreign country.
Generally, establishing a PE, even unintentionally, means your company will be liable for local corporate taxes, along with any penalties or interest that may be imposed by local tax authorities. Your company may be required to register or obtain authorization to do business in the foreign jurisdiction. Your company may also be subject to additional financial or other requirements applicable to employers in that jurisdiction, such as mandatory pension, insurance, or workers’ compensation contributions.
On top of these payments and penalties, your company may also be much more likely to be audited by local authorities going forward.
In addition to the consequences to your company, there can be financial and other implications for your employees that are working in the foreign location. For example, if local tax authorities determine that your company has established a PE in their jurisdiction, your employees working in that location can be subject to local income tax. A local authority’s PE finding can also have immigration consequences for your employees or may require certain withholdings from both your company and your employees.
How can you avoid permanent establishment risk?
With so many different PE tests and criteria, avoiding PE risk can seem like an impossible task. While there is no foolproof way to completely avoid this risk, there are things your company can do to mitigate it.
- Consult a qualified professional. Before you move into a new market, speak with a qualified tax or legal professional who can explain the local PE framework, assess your specific risk, and develop an informed plan for moving forward.
- Be strategic with in-country assignments. Consider how long your employee will be present in the foreign country, what types of job duties he/she will be performing, and where he/she will work from. When possible, minimize the length of time the employee is in country and the authority they have to bind the company and generate revenue. Avoid renting office space or having a dedicated company location.
- Evaluate your options. Evaluate the available options for employing talent internationally. Depending on your business model, these may include establishing a local entity, partnering with an employer of record (EOR), or using another compliant hiring structure. Each approach has different legal, tax, operational, and cost considerations.
Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.
As an employer, it's also important to understand the risks of employee misclassification. Read all about what that means and how you can avoid it in this blog post.
About Oyster
Oyster is a global employment platform designed to enable visionary HR leaders to find, hire, pay, manage, develop and take care of a thriving global workforce. It lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world with reliable, compliant payroll, and great local benefits and perks.
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