What is a permanent establishment (PE)?

Tax treaties split the right to tax business profits between two countries, and the dividing line is the permanent establishment. If an Indian agency has no PE in its client's country, its profits from that client are taxed in India; if it has one, the other country can tax the profits that belong to the PE.¹

What does a permanent establishment mean in simple words?

A permanent establishment is a level of business presence in another country that lets that country tax part of your profits. Article 5(1) of the India-US treaty defines a PE as "a fixed place of business through which the business of an enterprise is wholly or partly carried on".¹

• Fixed place: a place of management, a branch, an office, a factory or a workshop.¹
• Projects: a building site or construction, installation or assembly project, or supervisory activities connected with it, lasting more than 120 days in any twelve-month period.¹
• Services: furnishing services in the other country through employees or other personnel, other than included services under Article 12, for more than 90 days in any twelve-month period, or for a related enterprise.¹

For example, a software firm in Hyderabad delivering work over the internet usually has no place of business abroad.

Why does a permanent establishment matter for Indian exporters and freelancers?

A permanent establishment matters because it moves part of the right to tax your profits to the client's country.¹

• Income tax: under Article 7, an Indian business's profits are taxable only in India unless it carries on business in the other country through a PE there.¹
• Scope of taxing: if there is a PE, the US can tax profits attributable to it and profits from similar business activities carried on in the US.¹
• Remaining profits: profits not linked to the PE stay taxable only in India.¹

Most remote exporters never reach a PE; it matters when you open an office, send staff on site, or appoint a local agent.

How does a permanent establishment work?

A permanent establishment works as a threshold test under Article 5, followed by profit attribution under Article 7.¹

1. Test the presence: check the fixed-place test, the listed cases and the 90-day and 120-day counts.¹
2. Apply exclusions: Article 5(3) excludes activities of a preparatory or auxiliary character, such as a place kept only to collect information or advertise.¹
3. Check agents: a dependent agent who habitually concludes contracts or secures orders can create a PE under Article 5(4).¹
4. Attribute profits: only profits attributable to the PE, and similar US activities, are taxable in the US.¹

How do you check whether you have a permanent establishment?

You check by counting days and reviewing what you have in the client's country against the treaty with that country.¹

• Days: keep a log of days staff spend on site in each twelve-month period.¹
• Places: note any office, branch or workspace regularly at your disposal.¹
• Agents: review whether anyone abroad signs contracts for you.¹
• Sourcing: separately, the IRS lists the source of compensation for personal services as "where services performed".²

Treaty questions depend on facts, so confirm with a chartered accountant.

What is the difference between a permanent establishment and a fixed base?

A permanent establishment applies to business profits under Articles 5 and 7, while a fixed base applies to individual professionals under Article 15 of the India-US treaty.¹

A consultant or architect who spends a few weeks at a client's US office should count days under both tests.¹

What do people get wrong about a permanent establishment?

People often assume any foreign client creates a PE. A PE needs a fixed place of business or one of the listed cases in Article 5.¹

• One treaty for all: each treaty has its own Article 5.¹
• Remote work: remote work from India is generally not US-source income.²

How freelancers can create PE risk without meaning to is covered in permanent establishment risk for freelancers.

Which terms are related to a permanent establishment?

These terms come up when a treaty decides where profits are taxed:

• DTAA: the double taxation avoidance agreement that contains the PE article.¹
• DTAA for India-US freelancers: how the India-US treaty applies to individuals.¹
• Tax residency certificate: the proof of residence used to claim treaty benefits.
• Withholding tax: tax a foreign payer deducts at source.
• Foreign withholding tax in India: how Indian exporters handle tax withheld abroad.