Types of Permanent Establishment Risk While Hiring Globally

The idea of Permanent Establishment (PE) is one of the most crucial tax factors to take into account when companies grow internationally.  A PE decides if a foreign company's presence in another nation qualifies as a taxable business operation. Companies can avoid unforeseen tax liabilities and compliance issues by being aware of their types.

To put it simply, a permanent establishment occurs when a foreign company maintains a substantial or permanent presence in another nation where it conducts business.  Let's examine the main categories of PE that global companies need to understand.

1. Fixed Place PE

The most conventional and prevalent kind of PE is this one.  It occurs when a foreign company keeps a fixed location in another nation, like an office, factory, branch, or project site.

Three essential requirements must be fulfilled in order to be eligible as a Fixed Place PE:

• Business must be conducted in a physical location.
• The place needs to be permanent and easily recognized.
• The foreign entity must have access to it.

For example, a Fixed Place PE may be triggered if a foreign company runs a construction site in India for longer than ninety days.

2. Dependent Agent PE

A Dependent Agent PE arises when a person or entity in the host country acts on behalf of a foreign enterprise and habitually concludes contracts or secures business orders for them.

If this person is economically and legally dependent on the foreign company, their activities could create a PE. However, if they operate independently in their normal course of business, they would not constitute a PE.

3. Service PE

When employees of a foreign firm provide services in another country for a prolonged period of time, even if they r working remotely, more than 90 days during a fiscal year, that foreign firm will be considered as a permanent establishment in India. 

4. Agency PE (Commissionaire Arrangement)

An Agency or Commissionaire PE arises when a representative sells goods or services in their own name but does so primarily on behalf of a foreign enterprise. Even if the agent does not directly conclude contracts for the foreign company, their close commercial relationship could lead to a PE classification.

This model is common in distribution and franchising networks.

5. Digital or Virtual PE

Countries like India are changing their tax structures to accommodate digital or virtual presence in response to the growth of digital business models.  When a foreign business, like an online ad network, SaaS provider, or e-commerce platform, generates a sizable revenue stream from Indian users without maintaining a physical presence in India, a Digital PE may be established.

This recognizes that today, business presence is not limited to physical offices but can exist through digital interaction and revenue generation.

Why It Matters

Businesses entering new markets must be aware and have a strong understanding of PE classifications to prevent corporate tax obligations and fines.

Companies can hire, run, and manage teams in India without triggering a Permanent Establishment by working with an Employer of Record (EOR) as they allow businesses to explore new markets.

Source: https://www.orbtrak.com/insights/what-is-permanent-establishment-risk