Permanent Establishment (PE)

A Permanent Establishment (PE) is a concept used in double taxation agreements (DTAs) and national tax laws to determine when a non-resident business or entrepreneur is subject to taxation in a foreign country. It defines the circumstances under which a foreign enterprise has a taxable presence in another country.

Key Features of Permanent Establishment Taxability Trigger A non-resident enterprise is not liable for income tax in a country unless it operates through a permanent establishment in that country. PE acts as a threshold for tax jurisdiction. Attributable Income Even if a PE exists, the taxable income is limited to the profits attributable to the PE. Only activities linked to the PE are taxed, not the enterprise’s entire global income. Forms of PE Common examples include: Fixed place of business (office, branch, factory) Dependent agents acting on behalf of the enterprise Construction or installation projects lasting beyond a specified period Purpose Prevents tax avoidance by non-residents Ensures fair taxation of cross-border business activities Importance of Permanent Establishment Determines where a foreign business pays taxes Guides compliance with DTAs and local tax laws Avoids double taxation through proper attribution of income Establishes legal clarity for multinational enterprises

Example: A US-based company sends employees to India to work at a branch office. If the branch office qualifies as a PE, India can tax the profits generated by that branch, but not the company’s entire US income.