Under the OECD Model Tax Convention, permanent establishment rules decide when one country can tax the business profits of an enterprise based in another. The threshold sits in Article 5, and it works as a gatekeeper: cross it, and the host country taxes the profits attributable to your presence there; stay below it, and those profits remain taxable only at home. More than 3,000 bilateral treaties borrow this framework.1OECD. Tax Treaties The framework was rewritten in important ways by the 2017 BEPS Action 7 project and updated again in 2025 with new guidance on remote work, so older summaries can mislead.
The Core Definition: A Fixed Place of Business
Article 5(1) defines a permanent establishment as a fixed place of business through which an enterprise wholly or partly carries on its business. Article 5(2) lists common examples: a place of management, a branch, an office, a factory, a workshop, and any mine, oil or gas well, quarry, or other place of extraction of natural resources.2OECD. 2017 Update to the OECD Model Tax Convention The list is illustrative. Any location where business activity happens with enough regularity can qualify.
Three conditions have to line up. A physical place of business must exist. It must be “fixed,” meaning it has some real degree of permanence rather than being purely temporary. And the enterprise must actually carry on business through it. A conference attended once a year does not count. A leased office used weekly almost certainly does.
You do not need to own or formally lease the space. The OECD Commentary applies an “at the disposal” test: what matters is whether the enterprise has effective power to use a specific location for business purposes. A dedicated desk inside a client’s office, or a reserved area in a coworking space, can satisfy the test if the enterprise controls when and how it uses the space. Tax authorities look at actual use, not paperwork.
Home Offices and Remote Workers
The 2025 update to the Commentary addressed remote work directly for the first time, and the guidance is more concrete than many businesses expected. The central benchmark is a 50-percent working-time threshold. If an employee works from a home in a foreign country for less than 50 percent of their total working time over any twelve-month period, that home is generally not treated as a place of business of the employer.3OECD. The 2025 Update to the OECD Model Tax Convention
At or above 50 percent, the analysis shifts to whether there is a “commercial reason” linking the employee’s presence in that country to the enterprise’s business. A salesperson living where the company’s clients are located satisfies the test. An employee who relocates for personal reasons and happens to keep working remotely typically does not, even above the 50-percent line.
Even when both conditions are met, the arrangement must still be fixed. Use of the home has to be continuous over an extended period, not intermittent. The Commentary treats a three-month stretch as lacking the required permanence. Companies with employees who split time across countries should track working days carefully, because the threshold runs on a rolling twelve-month basis.
Construction and Installation Projects
Article 5(3) applies a separate, time-based test to building sites, construction projects, and installation work. These create a permanent establishment only if they last more than twelve months.2OECD. 2017 Update to the OECD Model Tax Convention The clock starts when work begins at the site, including preparatory activity like installing equipment, and runs until the project is handed over. Seasonal interruptions, weather delays, and labor shortages do not pause it.
Each site or project is measured individually. Two unrelated projects in the same country are not combined. But projects that form a single commercial unit are aggregated, which blocks the tactic of splitting one large project into shorter contracts to stay under twelve months. When the threshold is exceeded, the site is treated as a permanent establishment retroactively from day one of the work, not from the day it crossed the twelve-month mark. That retroactive effect catches businesses off guard more than almost any other PE rule.
Many actual treaties set the bar lower. The UN Model Tax Convention, which developing countries often prefer, uses a six-month test and expressly covers assembly projects and supervisory activities connected to construction.4United Nations Department of Economic and Social Affairs. Update of the UN Model Double Taxation Convention – Commentary on Article 5 Always check the specific treaty between the two countries involved.
Dependent Agents: PE Without a Fixed Place
A permanent establishment can exist with no fixed location at all. Under Article 5(5), if a person acting on behalf of a foreign enterprise habitually concludes contracts in the host country, the enterprise is deemed to have a PE there. The 2017 BEPS update broadened the rule to also cover a person who “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise.”2OECD. 2017 Update to the OECD Model Tax Convention In plain terms, the agent no longer needs formal signing authority. If they negotiate the deal and headquarters rubber-stamps it, that is enough.
Three types of contracts are covered: contracts in the name of the enterprise, contracts transferring ownership or granting rights to use the enterprise’s property, and contracts for the provision of services by the enterprise. This expansion closed a well-known loophole in which commissionnaire arrangements, where a local party sold goods in its own name but on behalf of the foreign enterprise, avoided a PE under the old rules.
“Habitually” matters. A single contract signed on an isolated business trip generally does not create a dependent-agent PE. There is no bright-line frequency test either. The Commentary says the threshold depends on the nature of the contracts and the business. Two large infrastructure deals per year may be habitual given that industry’s pace, even though two transactions sounds infrequent.
The Independent Agent Exception
Article 5(6) provides an escape: no PE arises when the enterprise operates through an independent agent acting in the ordinary course of that agent’s own business. A genuine broker or distributor serving multiple clients is treated as a separate business, not an extension of the foreign enterprise.
The 2017 update tightened the exception. An agent who acts exclusively or almost exclusively on behalf of one or more closely related enterprises cannot qualify as independent, regardless of how the agency contract is written. Two entities are “closely related” when one controls the other or both are under common control, with a benchmark of more than 50 percent beneficial ownership. As a practical guide, if an agent’s sales for unrelated enterprises are less than about 10 percent of its total agency sales, the OECD treats it as acting “exclusively or almost exclusively” for related enterprises.5OECD. Preventing the Artificial Avoidance of Permanent Establishment Status, Action 7 – 2015 Final Report
Tax authorities also weigh commercial substance: whether the agent bears its own risk, serves multiple principals, controls how the work is done, and uses its own assets and expertise. An agent that follows the enterprise’s detailed instructions, works from its office, and bears no financial risk if a deal falls through is unlikely to qualify as independent.
Preparatory and Auxiliary Activities
Article 5(4) carves out activities that, despite happening at a fixed location, do not rise to a permanent establishment. The exceptions include facilities used solely for storing or displaying goods, inventory kept solely for another enterprise to process, and a fixed place of business used solely for purchasing goods or gathering information. A catch-all exempts any fixed place used solely for activities of a “preparatory or auxiliary character.”2OECD. 2017 Update to the OECD Model Tax Convention The idea is that these functions are too far removed from actually earning profits to justify taxing them in the host country.
The Anti-Fragmentation Rule
The 2017 update added Article 5(4.1) to stop companies from slicing a cohesive operation into individually exempt pieces. The Article 5(4) exceptions do not apply if the same enterprise, or a closely related enterprise, carries on complementary business activities at the same location or elsewhere in the same country, and those activities together form a cohesive business operation that is not, taken as a whole, preparatory or auxiliary.5OECD. Preventing the Artificial Avoidance of Permanent Establishment Status, Action 7 – 2015 Final Report The target is structures where one affiliate runs the warehouse, another handles procurement, and a third manages customer logistics, each claiming its function is merely preparatory. If those functions together make up a core part of the supply chain, the exemptions collapse.
Servers and Digital Operations
A website alone cannot create a permanent establishment because it has no physical presence. A server does. When an enterprise hosts its website through a third-party internet service provider, the arrangement generally does not put the server at the enterprise’s disposal, even if the enterprise picked a particular server location.3OECD. The 2025 Update to the OECD Model Tax Convention The answer changes when the enterprise owns or leases and operates the server itself. Then the server’s location can be a PE if it is fixed, used with sufficient permanence, and the enterprise carries on business through it. This matters for e-commerce platforms, cloud services, and data-processing operations run from self-managed server farms abroad.
The Model Is Not the Treaty
The OECD Model is a template, not binding law. Every bilateral treaty is negotiated individually, and deviations are common. Some patterns come up repeatedly:
- Construction thresholds shorter than twelve months, often six under UN-influenced treaties, sometimes with explicit coverage of assembly and supervisory activities.4United Nations Department of Economic and Social Affairs. Update of the UN Model Double Taxation Convention – Commentary on Article 5
- Services PE clauses. The OECD Model does not put one in the main text but offers an optional alternative in the Commentary triggering a PE when an enterprise furnishes services through individuals present in the host country for more than 183 days in any twelve-month period. Many treaties with developing countries include such a clause.
- Country reservations on how specific terms are interpreted, including narrower or broader readings of “installation project” and supervisory work.3OECD. The 2025 Update to the OECD Model Tax Convention
- An optional 2025 provision for exploration and exploitation of natural resources with a lower PE threshold.3OECD. The 2025 Update to the OECD Model Tax Convention
The takeaway: never rely on the Model text alone. Pull the actual treaty between the two countries and check whether Article 5 has been modified.
What Happens Once a PE Exists
Article 7 sets the profit-attribution rule. The PE is taxed on the profits it would have earned if it were a separate, independent enterprise performing the same functions under the same conditions.6OECD. Attribution of Profits to Permanent Establishments This “functionally separate entity” approach mirrors the arm’s length principle used between related companies.
The analysis runs in two steps. First, identify the functions performed, assets used, and risks assumed by the PE as if it were standalone, including an appropriate share of capital so the PE is not artificially over-leveraged. Second, determine the profits that hypothetical entity would earn by applying standard transfer pricing methods to its internal dealings with the rest of the enterprise.7OECD. 2010 Report on the Attribution of Profits to Permanent Establishments Expenses genuinely incurred for the PE, including a reasonable share of head-office overhead, are deductible. Documentation standards match transfer pricing: contemporaneous records showing how internal dealings between the PE and head office were identified and priced.
Compliance in the host country begins with registration and a tax identification number, followed by annual corporate returns reporting the income attributable to the PE and the expenses allocated against it. Corporate tax rates across OECD and Inclusive Framework countries averaged 21.2 percent in 2025, though individual rates range from single digits to above 30 percent.8OECD. Corporate Tax Statistics 2025 – Statutory Corporate Income Tax Rates Many countries also levy a branch-level tax on profits deemed repatriated to the head office, meant to mimic the withholding tax that would have applied if the enterprise had operated through a local subsidiary and paid dividends. Treaty provisions often reduce or eliminate that second-layer tax, so the specific treaty language is worth checking.
A PE can also trigger payroll withholding, social security contributions for local employees, VAT registration, and ongoing maintenance filings. Because construction PEs and dependent-agent PEs can both apply retroactively, delayed registration can produce assessments, penalties, and interest reaching back to the first day the PE existed.
When Two Countries Disagree
Disputes over whether a PE exists, or how much profit belongs to it, create a real risk of the same income being taxed twice. Article 25 sets up the Mutual Agreement Procedure. A taxpayer that believes it is being taxed inconsistently with the treaty can present its case to the competent authority of either country, and the two authorities then try to reach agreement.
The BEPS Action 14 project established a minimum standard requiring participating jurisdictions to resolve treaty disputes in a timely, effective, and efficient manner. Countries publish MAP profiles with competent-authority contact details and procedural requirements.9OECD. Mutual Agreement Procedure Profiles Some treaties add mandatory binding arbitration when competent authorities cannot resolve a case within a set period, though arbitration is not universally adopted. PE cases tend to be slow because they often turn on facts: how many days an employee actually spent in a country, whether an agent truly negotiated the terms of a contract. Contemporaneous documentation is the best protection against a protracted process.