When can an Indian freelancer or agency have a permanent establishment abroad?

"Permanent establishment" (PE) is the treaty concept that decides when a business from one country has enough presence in another for that other country to tax its business profits. For Indian service exporters, it comes up when a consultant spends months on a client's site abroad, when an agency places staff with a foreign client, or when someone abroad signs contracts on the Indian business's behalf.

This guide sets out what the India-US and India-UK treaties say, using the texts published by the IRS and HMRC, including the India-US Protocol and the MLI changes to the UK treaty.¹²³ It does not predict outcomes: whether a PE exists depends on facts, the treaty text and the other country's own law. If any of the situations below apply to you, take advice from a chartered accountant (CA) and a tax adviser in the other country.

What is a permanent establishment under the India-US and India-UK treaties?

A permanent establishment under both treaties is, in the words of Article 5(1), "a fixed place of business through which the business of an enterprise is wholly or partly carried on".¹²

• Listed places: Article 5(2) lists places included "especially", among them a place of management, a branch, an office, a factory and a workshop.¹²
• India-US addition: the India-US list also names "a store or premises used as a sales outlet".¹
• India-UK addition: the India-UK list names "premises used as a sales outlet or for receiving or soliciting orders".²
• Three elements: the definition has a place of business, that is fixed, through which the enterprise's business is carried on. Each is a question of fact.¹²

The definition is the starting point; the service PE and agent rules extend it.

Who does permanent establishment risk apply to?

Permanent establishment risk applies to Indian businesses with people, premises or agents in the other country; individual freelancers are tested under a separate fixed base rule.¹²

Work done entirely from India does not involve a place, personnel or agent abroad on the face of the text.¹²

How do you assess permanent establishment risk for an engagement?

You assess permanent establishment risk by recording the facts the treaty text turns on, for any engagement involving travel or people abroad.¹²

1. Days: how many days you, your employees or other personnel spend in the client's country, counted within any twelve-month period for the service PE test and per taxable or fiscal year for the Article 15 test.¹²
2. Place: whether you have an office, desk or other place regularly available to you there, and for how long.¹²
3. Client relationship: whether the client is an associated or related enterprise, which shortens or removes the 90-day threshold in the service PE rule.¹²
4. People acting for you abroad: whether anyone there habitually concludes or negotiates contracts or secures orders for you, and whether they are independent.¹²
5. Nature of the services: whether the work is "included services" (India-US) or "fees for technical services" (India-UK), which the service PE rule excludes and Article 12 or 13 covers instead.¹²

For example, these facts are worth recording for a Chennai ERP consultant on a four-month implementation at a client's US plant, a Mumbai agency that seconds two account managers to a London client, or a Hyderabad IT firm whose US-based sales representative signs client contracts.

What service PE rules and day counts apply?

Both treaties have a "service PE" rule in Article 5(2) that can apply even without a fixed place of business, with a 90-day threshold and a shorter or no threshold for related enterprises.¹²

The table quotes Article 5 of each treaty.¹² Paragraph I of the India-US Protocol adds that where the period for a PE under Article 5(2)(j), (k) or (l) extends over two taxable years, a PE is not deemed to exist in a year in which the activity continues for less than 30 days in that taxable year.¹ Note the wording "activities of that nature": both treaties count days on which activities of that nature continue in the country, rather than days of a single person.¹²

How is the service PE day count calculated?

The service PE day count adds up the days on which activities of that nature continue in the other country, across one or more periods, within any twelve-month period, and compares the total with the 90-day threshold.¹²

• Step 1, list the periods: for example, say an agency's staff work on site in the UK for one period of 60 days and a later period of 40 days, both within the same twelve months.²
• Step 2, add them: the periods aggregate to 100 days, which the text counts as "a period or periods aggregating".²
• Step 3, compare: 100 days is more than 90, so on the face of Article 5(2)(k) the day condition is met, subject to the other conditions and the facts.²
• Step 4, overlapping staff: on the treaty wording, two people on site on the same day count as one day of activity, because the text counts days on which activities continue.¹²
• Step 5, related clients: if the UK client is an associated enterprise, the threshold is more than 30 days instead.²

Ask a CA and a UK or US adviser to confirm the count before relying on it.

What activities do not create a permanent establishment?

Article 5(3) of both treaties excludes certain activities, such as using facilities solely for storage or display of goods, or maintaining a fixed place of business solely for purchasing, collecting information, advertising, supplying information or scientific research of a preparatory or auxiliary character.¹²

• India-UK combinations: the India-UK text also covers any combination of these activities if the overall activity is preparatory or auxiliary.²
• MLI change: the gov.uk synthesised text shows Article 13 of the Multilateral Instrument (MLI) modifying Article 5(3): the exemptions do not apply where the same enterprise or a closely related enterprise carries on business at the same place or another place in that country and certain conditions are met.³
• Closely related: MLI Article 15 defines "closely related" for this purpose.³

Treat these exclusions narrowly when your business does more than preparatory work abroad.

Can an agent create a permanent establishment for an Indian business?

Yes, in defined cases. Under Article 5(4), a person other than an independent agent who acts in a country on behalf of an enterprise of the other country can create a PE.¹²

• India-US Article 5(4): if the person has and habitually exercises an authority to conclude contracts on behalf of the enterprise; or habitually maintains a stock of goods from which he regularly delivers on its behalf, with additional activities that contributed to the sale; or habitually secures orders wholly or almost wholly for the enterprise.¹
• India-UK Article 5(4): if the person has and habitually exercises an authority to negotiate and enter into contracts for the enterprise; or habitually maintains a stock of goods from which he regularly delivers; or habitually secures orders wholly or almost wholly for the enterprise or its group.²
• Independent agents: Article 5(5) of both treaties excludes a broker, general commission agent or other agent of independent status acting in the ordinary course of business, but not where the agent's activities are devoted wholly or almost wholly to the enterprise and, in the India-US text, the dealings are not at arm's length.¹²
• Subsidiaries: Article 5(6) of both treaties says that one company controlling, or being controlled by, a company in the other country does not of itself make either a PE of the other.¹²

The agent's authority and independence are the facts to record.

How is an individual freelancer treated: PE or fixed base?

An individual's professional income is dealt with in Article 15, which uses a "fixed base" test alongside a day count, rather than the PE test in Article 7.¹²

• India-US Article 15(1): income from professional services is taxable only in India unless the individual has a fixed base regularly available in the US for performing the activities, or stays in the US for 90 days or more in the relevant taxable year.¹
• India-UK Article 15(1): the UK may tax the income if the services are performed in the UK and the individual is present there for 90 days in the fiscal year, or the individual or partnership has a fixed base regularly available there.²
• Partners: India-UK Article 15(2) treats a partner as present on days when another partner is present performing services.²

Neither treaty defines "fixed base" in its definitions article; the term is applied on the facts.¹²

What happens if a permanent establishment or fixed base exists?

If an Indian enterprise has a PE in the other country, Article 7 allows that country to tax the business profits attributable to it.¹²

• India-US: Article 7(1) also extends to sales or business activities in the US of the same or similar kind as those effected through the PE.¹
• India-UK: only profits "directly or indirectly attributable" to the PE may be taxed in the UK, and Article 7(3) attributes a share of profits where the PE takes an active part in negotiating, concluding or fulfilling contracts.²
• Individuals: only income attributable to the fixed base or to the services performed during the stay may be taxed there.¹²

India still taxes the resident on that income and gives credit for the foreign tax, as explained in foreign tax credit.

What are the common mistakes with permanent establishment risk?

The common mistakes with PE risk are counting one person's days instead of activity days, forgetting related-enterprise thresholds, and overlooking people who sign contracts abroad.¹²

• Counting one person: both treaties count days on which activities of that nature continue.¹²
• Ignoring related clients: services to a related or associated enterprise shorten or remove the 90-day threshold.¹²
• Overlooking agents: a dependent agent who habitually concludes contracts can create a PE.¹²
• Relying on the old UK text: the MLI modifies the India-UK exemptions in Article 5(3).³

The treaty texts on the India-US and India-UK pages give the related articles in full.