Permanent establishment risk: when one remote hire makes you taxable abroad

What a permanent establishment is

Rule

OECD Model Art. 5most treaties follow it, with changes

Two main triggers

Fixed place or agentArt. 5(1) and Art. 5(5)

Construction sites

Over 12 monthsArt. 5(3)

Does an EOR remove it?

Noit reduces the fixed-place risk only

Under the OECD Model, a country can tax a foreign company's business profits only if the company has a permanent establishment there, and then only on the profits attributable to it. The model defines a PE in a few layers:

Article 5(7) adds that owning a subsidiary in a country does not by itself make the parent company a PE there. That is one reason companies that sell in a country set up an entity: the subsidiary is taxed on its own profits, and the parent's exposure is clearer. See EOR vs setting up your own entity for the costs.

How one remote employee can create a PE

The home office route. A home office is not automatically a place of business of the employer. The OECD Commentary asks whether the place is used on a continuing basis for your business and whether it is at your company's disposal, for example because you require the person to work from there rather than giving them an office. The 2025 update to the Commentary added guidance for cross-border home working: as a rule of thumb, a home used for less than 50% of the person's working time over a 12-month period is generally not treated as a place of business of the employer; above that, the answer depends on whether there is a commercial reason for the work to be done in that country, such as serving local customers.

The agent route. This is the bigger risk for sales hires. A person who habitually concludes contracts for your company, or habitually plays the principal role in getting contracts concluded that your company then signs without material change, can create a PE on their own, with no office at all. Since the 2017 version of the Model, having head office give the final signature does not fix this if the local person did the negotiating.

What the work is. Purely preparatory or auxiliary work, such as research or support functions that only help the business, is excluded. Selling, delivering client services and managing the business usually is not.

What an EOR changes, and what it does not

An EOR makes its local entity the legal employer. The worker is on the provider's payroll, under the provider's employment contract, and the provider runs local tax withholding and social contributions. That helps in three ways: you are not registered as an employer in the country, the home office is less clearly at your disposal, and the job is set out in the provider's employment contract.

What it does not change:

• Who the person acts for. Article 5(5) asks whether a person acts on behalf of your company and habitually concludes, or plays the principal role in, its contracts. An EOR employee who sells your product is acting for you.
• What the work is. If the person does your core business from one place for a long time, the fixed-place question stays open regardless of payroll.
• Local law. Some countries apply domestic rules that are wider than the treaty, and some workers are in countries with no treaty with your home country at all.

Steps that reduce PE risk

1. Limit contract authority in writing. State in the job description and internal policy that the person may not negotiate final terms or sign contracts for your company. Ask the EOR whether its employment contract can include the same limit.
2. Keep negotiation and approval at head office. Pricing, discounts and final terms should be decided and documented outside the country, and the local person should not be the one who settles them.
3. Watch titles and signals. "Country manager", local business cards, a local office address on your website or a local phone number for sales all point toward a presence.
4. Do not provide an office. Renting a desk or coworking space for the person in your company's name is a fixed place of business.
5. Track time and location. Keep a record of where the person works and for how long, and of any travel to meet customers.
6. Read the actual treaty. Check whether the treaty between your home country and the worker's country follows the 2017 wording on agents, an older version, or has its own rules.
7. Plan the entity when you start selling. If you will have revenue-generating staff in a country, the cleaner route is often a subsidiary that books its own profits.

If you are a US company

US companies face the question in two directions. Abroad, the treaty between the United States and the worker's country decides whether you have a PE there, and countries without a US tax treaty apply only their own domestic law. At home, hiring in another US state is a different issue: it is about state income tax nexus, payroll registration and unemployment tax, not treaty PE. For a US hire in a new state, see our 2026 state unemployment tax rates and PEO vs EOR for the domestic options.

We have not included US-specific PE cases or IRS guidance on this page because we could not verify them for this update.

PE risk by hiring model

The cost side of the EOR and entity routes is on our ranked EOR providers page and in the international employee cost calculator.

Common mistakes

• Assuming the EOR takes the tax risk. The EOR is the employer, not your tax shield. It does not file your corporate tax return.
• Letting head office sign as a workaround. If the local person negotiates the deal, the 2017 agent wording can still apply.
• Giving a first hire a country manager title. Titles and authority should match what you want the tax position to be.
• Ignoring the country. Treaty wording varies. A rule that holds for the United Kingdom may not hold for India, Germany or Canada.
• Waiting for a tax audit to decide. If staff will generate revenue in a country, price a local entity before the sales start.