Permanent Establishment: Fixed Place, Agent PE and Treaty Thresholds

Concept

A permanent establishment (PE) is the threshold that lets a country tax the business profits of a foreign company that operates there without a local subsidiary — through an office, a site, or a person who effectively makes its deals. Whether a PE exists is decided twice: first under the source country's domestic law, then under the applicable bilateral tax treaty, and the treaty answer prevails when it is narrower. Finding a PE is only stage one; how much profit the country may tax is a separate exercise.

A permanent establishment is not an entity, a registration, or a licence. It is a legal conclusion: a foreign company's presence in a country has crossed the line at which that country may tax the company's business profits at source. Below the line, a company can sell into a market, ship goods to customers, even send visiting employees, and the market country generally may not tax its trading profits — only, at most, withholding taxes on specific flows such as dividends, interest or royalties. Above the line, the company owes corporate income tax in the market country on the profits attributable to that presence, files local returns, and typically keeps branch accounts.

The concept exists because the international system splits taxing rights between the residence country (which taxes worldwide profits — see corporate tax residence) and the source country (which taxes only what is sufficiently anchored in its territory). The PE definition is the anchor test. Nearly every bilateral treaty carries it in Article 5, paired with Article 7, which says the source country may tax only the profits attributable to the PE — not everything the company earns from that market.

A UK engineering company sends staff to Spain for an installation project. If the project runs eight months, Spanish domestic law already treats it as a PE, but the UK–Spain treaty requires more than twelve months for a building or installation project — so Spain may not tax the profits. If the same project runs fourteen months, a treaty PE exists, and Spain taxes the profit properly attributable to the Spanish activity, while the UK relieves the double taxation. With the company and contract unchanged, the result depends on the project's duration and the treaty text.

Three features define how PE risk actually behaves. First, it is bilateral and regime-specific: the same facts can create a PE under one treaty and not under another, because treaty wording differs — there is no single worldwide PE rule, and the OECD Model Commentary is interpretive context, not law. Second, people can create a PE without premises: a dependent agent who habitually makes the company's contracts is enough, which is why sales roles are scrutinised more than warehouses. Third, existence and consequence are separate stages: a PE with minimal local functions may attract little taxable profit, and a company can have a PE that is loss-making — but the compliance obligations arrive with existence, not with profit.

Key parameters of the PE concept:

Two thresholds: domestic law and the treaty

A source country can only tax what its own statute reaches, and a treaty can only restrict, not extend, that domestic charge. So every PE question is answered twice, in a fixed order: does domestic law create a taxable presence, and if so, does the treaty allow the country to use it? That order is a rule of law, not a habit of practice: in the UK a treaty takes precedence over domestic legislation by virtue of section 6 of TIOPA 2010, and HMRC's manual states the limit alongside this — treaties "can vary the extent of or even remove the charge to tax on a person under domestic law but cannot impose a charge to tax where one does not already exist at all under our domestic law" (INTM264200). A state whose own statute reaches nothing gains nothing from Article 5.

Domestic law and the treaty use different wording and thresholds. In the UK, the domestic definition sits in sections 1141–1143 of the Corporation Tax Act 2010: a fixed place of business through which the business is wholly or partly carried on, plus an agency limb. As amended with effect for periods from 1 January 2026, the UK agency limb covers a person who habitually concludes contracts, or habitually plays the principal role leading to contracts that are routinely concluded without material modification by the company — the post-2017 OECD formulation — and the exclusions apply only to activity that is preparatory or auxiliary "and not part of a fragmented business operation". The UK statutory list includes a building site with no minimum duration at all; per HMRC's International Manual (INTM264100), the treaty provisions are then applied alongside domestic law.

Spain's domestic definition in the Non-Resident Income Tax Act (TRLIRNR, Article 13) is drawn even more broadly: facilities or a place of work used on a continuous or habitual basis, with construction or installation projects becoming a PE after just six months. The UK–Spain treaty then overrides with a twelve-month construction threshold. Germany's domestic concept (Betriebsstätte, §12 of the Fiscal Code — Abgabenordnung) likewise reaches further than treaty PEs, which is why German administrative guidance discussed below matters mainly for what Germany chooses not to assert.

The table compares the four regimes a UK- or Spain-facing business actually meets — two domestic laws and two live treaties.

Domestic definitions are broad and treaties narrow them, so the operative question for a treaty-protected company is almost always the treaty one — but a company from a non-treaty jurisdiction faces the raw domestic definition, six-month Spanish construction clock included.

Domestic tests across eight jurisdictions

The two treaties above are the ones a UK- or Spain-facing business meets most often. The wider picture is the one below: eight domestic regimes read against the two model conventions that shape almost every treaty in force. The column that moves most is the construction clock, and the column that decides most disputes is the agent one.

The construction column spreads from three months to no clock at all, and the spread is not cosmetic. An Italian project crosses its domestic threshold in the fourth month, a German, Spanish or Emirati one in the seventh, and a treaty on the OECD pattern pushes all of them out to the thirteenth. For a company with treaty protection the domestic clock is background noise; for a company without it, the domestic clock is the whole answer, which is why the same nine-month project is taxable in one direction and invisible in the other.

The agent column is where the drafting has moved. The United Kingdom, Italy and the model convention now ask who plays the principal role leading to a contract, not who signs it, which takes the commissionaire structures of the Zimmer era out of reach. Germany never needed the change: §13 AO has always described a representative who solicits orders or delivers from a local stock, and the Emirati rule reaches a person who habitually negotiates, whether or not anyone locally signs. Singapore is broader still, deeming a PE where someone merely secures orders. The practical test is not the signature block but whether the local person's work is what makes the deal happen.

A services PE is provided for in few of the regimes compared. Outside the UN Model and the Singaporean supervisory rule, sending people rather than opening an office usually keeps an enterprise outside the fixed-place limb — until the treaty in question carries a services article, which many treaties with developing economies do. Anyone pricing a consulting engagement abroad reads the specific treaty rather than the model.

Fixed place PE: the four elements

Article 5(1) of both treaties uses the same sentence: a fixed place of business through which the business of an enterprise is wholly or partly carried on. Four elements are assessed, and each can fail independently.

There must be a place — premises, space, or equipment; a market, a desk, a server room can qualify, and ownership is irrelevant. The place must be fixed, geographically and in time: HMRC's manual (INTM264430) treats "fixed" as requiring a distinct location and a degree of permanence, and HMRC stated in its pandemic guidance (INTM261010) that a non-resident company "will not have a UK fixed place of business PE after a short period of time as a degree of permanence is required". The place must be at the disposal of the enterprise — the company must have effective power to use it, not merely presence in it; this is the element on which most home-office questions turn. And the business must be carried on through it — activity of the enterprise itself, not of an unrelated party.

Cross-border working from home: the 2025 Commentary model

The update to the OECD Model Tax Convention was approved by the OECD Council on 18 November 2025 and published on 19 November 2025. Paragraphs 18–19 of the Commentary on Article 5, which carried the previous home-office analysis, were deleted; in their place sits a new block, paragraphs 44.1–44.21, headed “Cross-border working from a home or other relevant place”, worked through paragraph by paragraph and example by example in the home office abroad. In place of an open weighing of all the circumstances, the Commentary sets out two sequential stages.

The first stage is temporal: under paragraph 44.8, use below 50% of actual working time for that enterprise generally does not make the home a place of business. The test uses any rolling twelve-month period commencing or ending in the fiscal year, rather than the contractual work pattern. The detailed calculation is explained in home-office permanent establishment.

The second stage engages at 50 per cent and above. Paragraph 44.10 sends the question to the facts and circumstances; paragraph 44.11 identifies the prominent consideration as whether there is a commercial reason for the individual's presence in that country — client meetings, work with local suppliers, serving the market in its own time zone, collaboration with a local team.

Cost saving and employee retention

The Commentary expressly excludes the two most common explanations. Paragraph 44.16: an enterprise that permits home working “solely to reduce costs (for example, reduced expenditure on office space)” does so for that purpose, and no commercial reason is present. Paragraph 44.15 disposes the same way of permission granted “solely to obtain or retain the services of that individual”. Without that reason the home generally is not an enterprise place of business, unless other circumstances indicate otherwise (paragraph 44.19). The significance of the former criterion — that the employer required home working — has changed: employer requirement bears on power of disposal over the space, without amounting to a commercial reason on its own.

What the threshold does not settle

Fifty per cent is a presumption. Below it the Commentary says “generally”; above it, assessment on the facts and circumstances opens, with the commercial reason a prominent consideration among others. The permanence requirement (paragraphs 28–34 of the Commentary) and the preparatory-or-auxiliary exception (Article 5(4)) continue to apply in parallel: a home from which only auxiliary functions are performed stays outside the definition at any share of time.

The status of the document is a separate question. This is Commentary on the Model Convention; it does not change the text of treaties in force. How much weight the new edition carries in a given dispute depends on whether the jurisdiction reads commentaries dynamically or statically, and states entered reservations to the new block — Israel, for one, in respect of paragraph 44.20. Domestic guidance continues on its own terms: the BMF guidance of 5 February 2024 still gives the safe answer for an ordinary employee's home office for German domestic and treaty purposes, and Spanish ruling DGT V0066-22 leaves post-pandemic telework to a case-by-case analysis.

The 50% threshold and corporate residence

PE and corporate residence remain separate questions: Article 5 concerns a local place of business, while Article 4 concerns the residence of the company as a whole. The 50% working-time threshold does not decide residence. For a director who is the only or primary person conducting the enterprise's business, paragraph 44.20 also requires separate consideration in the PE analysis; a job title alone does not establish that condition. The interaction is explained in home-office permanent establishment.

The residence side of that boundary is mapped in corporate tax residence.

What else the 2025 update carried

The same package introduced an optional provision allowing contracting states to agree a lower PE threshold for offshore exploration of natural resources. The update also clarifies Article 9 on financial transactions and interest deductibility, and Article 25 on the mutual agreement procedure and its interaction with GATS obligations.

Dependent agent PE: who really makes the contracts

The second route needs no premises. Under Article 5(5) of both the UK–Germany and UK–Spain treaties — which keep the pre-2017 wording — a person who has, and habitually exercises, authority to conclude contracts on behalf of the enterprise creates a PE for it, unless the person is an independent agent acting in the ordinary course of its own business (Art 5(6)).

Three points decide most agent cases. Authority is substantive, not formal: an agent can conclude contracts without signing them, if their agreement is what commits the company (HMRC INTM264510). "Habitually" is a matter of fact and degree — isolated deals are not enough, and there is no fixed number. And independence is tested both legally and economically (INTM264530): a broker with many clients bearing its own entrepreneurial risk does not create a PE; a captive intermediary working exclusively or almost exclusively for one group is not independent — the UK statute now says this expressly for closely related persons (CTA 2010 s.1142(1A)).

The 2017 OECD update — carried into treaties via MLI Article 12 — broadens this to persons who habitually play the principal role leading to contracts that the enterprise routinely rubber-stamps, and to commissionnaire structures. But MLI Article 12 modifies a given treaty only where both parties opted in. Spain adopted Article 12; the UK reserved against it; so the UK–Spain treaty keeps the old wording, and the UK–Germany treaty was not touched either. The result is a real asymmetry as of 2026: UK domestic law uses the principal-role test, while the UK's treaties largely still use the narrower authority test — and the treaty prevails for companies entitled to its benefits.

Same structure, two courts. The commissionnaire — a local company selling in its own name for a foreign principal's account — was the test case for how far "authority to conclude contracts" reaches, and two supreme courts read it in opposite directions.

In Société Zimmer Ltd (Conseil d'État, 31 March 2010, no. 304715) France held that a commissionnaire creates no agency PE because, contracting in its own name, it does not bind the principal to the deals it signs — "sauf s'il ressort, soit des termes mêmes du contrat de commission, soit de tout autre élément de l'instruction, que … le commettant est personnellement engagé". Private-law form governed, subject to recharacterisation on the evidence.

In Dell Products (Tribunal Supremo, judgment 1475/2016 of 20 June 2016, appeal 2555/2015) Spain took the opposite view of a comparable structure: the Spanish commissionaire was a dependent agent because it worked to the Irish principal's instructions on prices and commissions and was inspected by it, and the principal also had a fixed place of business through the commissionaire's premises and staff — committing an enterprise, the court held, need not run through direct representation.

Two things follow. Which reading applies is a question of the forum's law and of the treaty in front of it, not of the structure's label: the same contract can sit outside PE in one country and inside it in another. And the divergence is why MLI Article 12 exists — the principal-role test was drafted to make the Zimmer answer unavailable in treaties that adopt it. Whether it reaches a given structure still depends on both states having opted in, which for the UK–Spain and UK–Germany treaties they did not.

Exceptions: preparatory, auxiliary, and the anti-fragmentation catch

Article 5(4) of both treaties lists activities that do not create a PE even through a fixed place: storage, display or delivery of the company's own goods; stock held for processing by another; purchasing or information-gathering offices; and other activity of a preparatory or auxiliary character — with the closing requirement that the overall activity of the fixed place remains preparatory or auxiliary. A warehouse used solely to store and deliver the company's goods is the canonical protected case.

Two anti-avoidance rules qualify this, and they apply unevenly. First, anti-fragmentation: under MLI Article 13(4) — which does modify the UK–Spain treaty, because both sides adopted it, together with the MLI Article 15(1) definition of closely related persons — the carve-out is lost where the company or a closely related enterprise carries on complementary functions of a cohesive business at the same or another place in the country that is (or together would be) a PE. Splitting one business into "auxiliary" fragments across group companies stops working under that treaty. The UK–Germany treaty contains no such clause: its Article 5 was not amended by the 2021 Protocol and is not MLI-modified. Second, contract-splitting for construction projects is addressed by MLI Article 14 — but Spain reserved against Article 14 and the UK adopted neither it nor an Article 13 option beyond paragraph 4, so neither treaty imports it; artificial splitting is instead a question for the treaty's principal purpose test.

The practical rule: check the synthesised text of the specific treaty before assuming either the old exemptions or the new anti-abuse rules apply — HMRC publishes each UK convention together with its MLI synthesised text, country by country. The MLI changed some treaties, some articles, and nothing uniformly.

Service, insurance and other special PE variants

Fixed place and dependent agent are the two routes every treaty carries. Many treaties carry more, and those extra routes are the ones missed most often, because nothing is rented and nobody signs anything.

The widest is the service PE. The UN Model Convention (2017 update), the pattern most capital-importing states negotiate from, deems a PE where an enterprise furnishes services, including consultancy services, through employees or other personnel, if activities of that nature continue in the country "for a period or periods aggregating more than 183 days in any 12-month period" (Article 5(3)(b)). Live treaties go further: the UK–India convention of 1993 sets the services threshold at more than 90 days in any twelve-month period, and at more than 30 days where the services are performed for an associated enterprise (Article 5(2)(k)). Under a treaty of that family, a consulting team with laptops and hotel rooms crosses a line that a leased warehouse never does.

The same family widens three other things. The construction limb is shorter and broader — six months rather than twelve, and it counts supervisory activities connected with the site (UN Model Article 5(3)(a); UK–India Article 5(2)(j)). The list of exceptions omits delivery, so a warehouse that stores and delivers the company's own goods, protected under the UK–Spain treaty, is not protected by the equivalent UN-model text (UN Model Article 5(4)). And the agent limb reaches a person who habitually maintains a stock of goods in the country from which they regularly deliver on the enterprise's behalf, whether or not that person concludes anything (UN Model Article 5(5)). Insurance has a rule of its own: an insurer, reinsurance apart, is deemed to have a PE where it collects premiums or insures risks in the other state through a person who is not an independent agent (UN Model Article 5(6)).

So "we have no office and nobody signs" is a defence under an OECD-pattern treaty, not a general one. In a new market the first question is which pattern the applicable treaty follows and what its Article 5 actually enumerates: the number of routes changes between treaty families, not only the thresholds on them.

A PE exists — now how much can be taxed? Two different stages

Establishing that a PE exists answers only the first question. The second — attribution of profits — is governed by Article 7 and is a separate analysis with its own method and its own disputes. Both treaties direct that the PE be treated as if it were a distinct and separate enterprise dealing independently with the rest of the company: profits are attributed based on the functions performed, assets used and risks assumed through the PE, using transfer-pricing-style analysis of dealings between the PE and head office.

The separation matters in both directions. A "big" presence can carry little profit: a fourteen-month installation project taxed in Spain is taxed on the margin attributable to the local activity, not on the whole contract price. And a PE can exist with no net profit at all — a loss-making branch is still a PE, still registers, still files: in the UK a company coming within the charge to corporation tax must give notice of the beginning of its first accounting period no later than three months after it begins (Finance Act 2004, s.55), an obligation attached to existence and not to profit. Conversely, conceding that a PE exists is not conceding the assessment: the amount is negotiated or litigated separately, and when two countries attribute inconsistently and double taxation results, the route is the mutual agreement procedure described in double taxation despite the treaty.

Attribution also has a mirror image at home. The residence state must relieve the double taxation the PE creates, and the method is a policy choice: a credit for the source-country tax, or exemption of the branch result. The UK offers the second by election — a company may elect under section 18A of the Corporation Tax Act 2009 for the profits and losses of its foreign permanent establishments to be left out of its UK taxable profits; the election is irrevocable and applies to all of that company's foreign PEs for every accounting period beginning on or after the relevant day (s.18F). The symmetry cuts both ways: a branch expected to run losses is a poor candidate, because those losses stop being available at home. Branch versus subsidiary is therefore not only a PE question but an entity-and-relief question, and how each vehicle and its income are classified on both sides is mapped in entity classification.

What a PE is not

Three neighbouring statuses are routinely confused with corporate-tax PE, and each runs on its own rules.

VAT fixed establishment is a different test in a different tax. EU VAT law asks whether there is a structure with sufficient human and technical resources to receive or supply services; a company can have a VAT establishment without a corporate-tax PE and vice versa. Registering for VAT in a country neither creates nor concedes a PE.

Employment and social security status of staff is not the company's PE status. An employee working in a country can trigger payroll withholding, social security contributions and personal tax residence for the employee — see tax residency basics — without the employer acquiring a PE. The reverse is also true: a dependent agent PE can exist through a person who is not even an employee.

PE is not corporate residence. A company resident nowhere near the market keeps its residence; a PE gives the source country a slice, not the company a new home. When management itself migrates, the question changes from Article 5 to Article 4 — that boundary is mapped in corporate tax residence. For groups, where the PE line sits also shapes how holding structures place people and functions.

Trigger and exclusion matrix

Recurring fact patterns provide indications specific to each regime rather than ready conclusions.

Each fact pattern must be tested against the specific treaty's text, because the result can differ between treaty pairs.

Four scenarios, one fact changed

Home office. A UK software company's engineer moves to Munich and works from her flat two or three days a week, the rest from the London office, where her desk is kept. Across any rolling twelve-month window her share of work from the flat stays below half, so under paragraph 44.8 of the 2025 Commentary the flat is generally not a place of business of the enterprise; the BMF's February 2024 guidance amending the decree on §12 AO reaches the same answer under German domestic law, because the employer lacks power of disposal over the flat. Change one fact: the London desk is given up, she works from Munich permanently and visits London once a quarter. The threshold is crossed, the second stage engages, and the explanation “it is cheaper than keeping a desk in London” fails as a commercial reason under paragraph 44.16; absent other circumstances, this points away from an enterprise place of business. Same flat, a different share of time and a different explanation.

The negotiator. A German manufacturer's UK-based sales lead negotiates all commercial terms with UK customers; contracts are formally executed in Germany without material change. Under the UK–Germany treaty's pre-2017 Article 5(5), the argument is that she lacks authority to conclude contracts; under UK domestic law from 2026 she plays the principal role — but the treaty's narrower test protects the German company from the domestic charge. Change one fact: she commits the company herself — pricing, terms, final yes. Now she habitually exercises authority to conclude contracts and an agent PE exists under domestic law and the treaty; the UK taxes the profits attributable to her sales function, not the manufacturer's entire UK revenue.

The warehouse. A UK online retailer leases a warehouse near Madrid used solely to store and deliver its own goods. Article 5(4) of the UK–Spain treaty protects it: storage and delivery of the enterprise's own merchandise is a listed exception, provided the overall activity stays preparatory or auxiliary. Change one fact: the retailer's closely related Spanish subsidiary runs a showroom and after-sales operation in Spain, and the warehouse is one complementary function of that cohesive business. MLI Article 13(4), which applies to this treaty, switches off the carve-out — the fragments are read together. Under the UK–Germany treaty, which has no anti-fragmentation clause, the same restructuring would still leave the warehouse outside the PE definition.

The short project. A UK contractor runs an eight-month installation project in Valencia (timeline illustrative). Spanish domestic law finds a PE at six months; the UK–Spain treaty requires more than twelve, so Spain may not tax the business profits — the treaty threshold, not the domestic one, decides for a company entitled to treaty benefits. Change one fact: the project overruns to thirteen months. The treaty threshold is crossed and, on the OECD Commentary's reading (context, not treaty text), the site is treated as having been a PE from its first day — attribution then covers the whole project period, not just month thirteen onward.

The common principle: none of these outcomes follows from the label "remote work", "sales rep", "warehouse" or "project". Each follows from one operative fact — disposal, authority, cohesion, duration — inside one specific regime.