Plain English
You can owe tax in a country without having a company there. A permanent office, a construction site running long enough, or a person habitually concluding contracts on your behalf can all create a taxable presence. Once one exists, profit must be attributed to it — a close cousin of transfer pricing.
Technical definition
Article 5 of the OECD Model defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on, with specific inclusions, a preparatory or auxiliary exclusion, and a dependent agent rule broadened by BEPS Action 7.
Why it matters
Unrecognised PEs create unfiled returns, penalties and double taxation, and remote working has multiplied the fact patterns that need monitoring.
How it works in practice
- 01Test for a fixed place of business at the disposal of the enterprise.
- 02Test the dependent agent rule, including habitual conclusion of contracts or the principal role leading to their conclusion.
- 03Consider the preparatory or auxiliary exemption and the anti-fragmentation rule.
- 04If a PE exists, attribute profits under the authorised OECD approach, treating the PE as a separate enterprise.
Worked example
The remote salesperson
An employee based in Italy for a UK company spends most of her time negotiating the material terms of contracts routinely signed without modification in London. Post-Action 7 this pattern points toward a dependent agent PE in Italy, even though she signs nothing.
Common mistakes
- Assuming no signature means no PE.
- Treating home offices as automatically out of scope.
- Creating a PE and never attributing profit to it.
Audit red flags
- Long-term secondments with local customer-facing roles.
- Project sites approaching the treaty duration threshold.
Documentation & data
Documents to hold
- PE risk register by country and individual.
- Profit attribution analysis where a PE exists.
- Travel and activity records.
Data you need
- Employee location data.
- Contract negotiation records.
- Project duration tracking.
Who owns this internally: Group tax with HR and mobility.
Jurisdiction notes
- OECD
- Article 5 as modified by BEPS Action 7 and implemented for many treaties through the MLI.
- Global
- Domestic PE definitions can be broader than treaty definitions where no treaty applies.
Notes by role
CFOs & finance leaders
Remote work policies are a tax question as well as an HR one. Approve locations centrally.
Students & job seekers
PE and profit attribution sit next to transfer pricing in most interviews. Know how they differ.
Frequently asked
- Is PE part of transfer pricing?
- Strictly it is a separate question of taxing rights, but the profit attribution that follows uses closely related functional analysis.
Sources & status
- Primary source
OECD Model Tax Convention, Article 5 and Article 7
OECD, 2017
- Primary source
BEPS Action 7 Final Report
OECD, 2015
Reference material only, not advice on a specific fact pattern. Reviewed 2026-06-30.
Careers
How this shows up in the job
PE questions are the most common non-transfer-pricing question in a transfer pricing interview.
Careers in transfer pricing