What a permanent establishment is
A permanent establishment (PE) is a business presence strong enough for a country to tax a foreign company's profit. Article 5 of the OECD Model Tax Convention defines it as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Under Article 7, business profits are taxed only where the company is resident unless it has a PE in another country, which may then tax the profit attributable to the PE.
Most bilateral tax treaties start from the Model's Article 5, and some add a services PE clause that counts days, such as the UN Model's Article 5(3)(b): a PE once a company's services in a country, consultancy included, run past 183 days in any 12-month period (UN Model Convention, 2017 update). The definition reaches freelancers too, because Article 3 counts professional services and other independent activities as business. Countries also write their own PE definitions into domestic law, and those apply on their own where no treaty covers the 2 countries involved.
For a founder, PE is one of 3 tests that decide where the company's profit is taxed. Your country of residence can tax it through CFC rules, and the place of effective management test can make the company itself resident where it is run. A PE claim is narrower: the company stays resident where it is registered, and the other country taxes only the profit that belongs to the PE. That is still enough to undo most offshore company setups, which assume the registry is the only country with a claim.
The 3 routes to a permanent establishment in the OECD Model (Article 5)
| Route | Article | What creates a PE | What does not |
|---|---|---|---|
| Fixed place of business | 5(1) and 5(2) | A place through which the company's business is wholly or partly carried on, such as a place of management, branch, office, factory or workshop | Storage, display, delivery, purchasing, collecting information and other activity, but only when preparatory or auxiliary (5(4)) |
| Building site, construction or installation project | 5(3) | A project that lasts more than 12 months | Shorter projects |
| Dependent agent | 5(5) | A person who habitually concludes contracts for the company, or plays the principal role leading to contracts it routinely concludes without material modification | An independent agent acting in the ordinary course of its business; not one acting exclusively or almost exclusively for closely related companies (5(6)) |
The fixed place of business test
A fixed place PE needs 3 things: a place of business, a fixed location used long enough to count as permanent, and the company's business carried on through it (HMRC INTM264300).
Permanence has no day count in Article 5. HMRC applies the test to foreign staff working in the UK: 2 stays of 40 days, holiday included, 6 months apart, do not meet it, while a fixed 3 months every year under a permanent contract does, because that presence is fixed rather than random or sporadic (HMRC INTM264435). The OECD Commentary adds that places of business kept for less than 6 months have normally not been treated as PEs while many kept longer have been, though a shorter use can still count when it recurs or when the business is carried on only in that country (Commentary on Article 5, paragraph 28, in the OECD Model).
Storing, displaying or delivering goods, keeping stock, purchasing and collecting information do not create a PE when they are only preparatory or auxiliary; the 2017 Model makes that condition apply to every item on the list (Article 5(4)), while older treaties exempt most listed items outright. For a service business it rarely helps: writing code, advising clients or running campaigns is the business itself.
Remote work from home: the OECD's 50% test
The 2025 update to the OECD Model, adopted in November 2025, added a working-time test to the Commentary on Article 5: a home is generally not a place of business of the company if the individual works from it for less than 50% of total working time over any 12-month period.
At 50% or more the answer depends on facts and circumstances, chiefly whether there is a commercial reason for the work to be done in that country, such as facilitating business with local customers or suppliers (KPMG EU Tax Centre).
The Commentary guides how treaties are read; it is not law. In a KPMG survey of 63 jurisdictions in March 2026, 68% used it to interpret their domestic PE rules, while the US and Brazil said it is not relevant there (KPMG). Chile, Czechia, India, Israel, Malaysia and Nigeria recorded observations, reservations or positions on the home office paragraphs, and Israel reserves the right to treat a founder's home office as a PE (2025 update, observations on the Commentary on Article 5, paragraphs 220 to 226, and positions on Article 5, paragraphs 55 and 58 to 61).
For employees the test is mostly a question for the employer, and it shapes whether an employer allows working remotely from another country at all or hires through an employer of record with its own local entity. Founders fall outside the 50% line: the same update says different considerations apply where one individual is the only or primary person conducting the business, and that a consultant who spends an extended period in a country running most of her own consulting business from a home office there has a place of business in that home (2025 update, paragraph 44.20).
The 50% test does not shelter a one-person company
A founder who runs a UAE free zone company alone from her apartment in Lisbon works there nearly all the time and has no other office. Counting her days against the working-time test protects nothing, because she is the one-person business paragraph 44.20 sets apart, and Portugal can treat the apartment as the company's place of business for every year she lives there.
Dependent agent PE: signing contracts where you live
A company can have a PE with no place at all. Under the current OECD Model wording, a person who habitually concludes contracts for the company in a country, or habitually plays the principal role leading to contracts the company routinely concludes without material modification, gives it a PE there. The UK aligned its own definition with that wording for chargeable periods beginning on or after January 1, 2026 (HMRC INTM264300).
Many older treaties keep the earlier test, an agent who habitually exercises an authority to conclude contracts in the company's name. Both versions exclude independent agents acting in the ordinary course of their business: older treaties name brokers and general commission agents, and the 2017 Model adds that an agent working exclusively or almost exclusively for closely related companies is not independent (Article 5(6)). A founder who negotiates only for the company they own is not that kind of agent.
Moving to a new apartment every 2 months weakens the case that any single home is a fixed place of business, but it does nothing against the agent test in the country where you spend most of the year negotiating and signing contracts, or against a services PE clause, which counts your days in the country wherever you sleep.
Permanent establishment for a one-person company
PE rules were written for groups with branches, yet they fit a one-person company closely: the owner is the staff, the home is the office and the owner signs every contract. Estonia's Tax and Customs Board says so about Estonian companies formed by e-residents: one managed from abroad will probably have a permanent establishment abroad, and income tax must be paid on its profit in that country (EMTA).
The same reasoning applies to a company in any registry, because countries define a PE by what happens on their own territory, and Spain's Non-Residents Income Tax Law and Germany's Fiscal Code both put the place of management first on their list.
How the OECD Model, Spain and Germany define a permanent establishment
| Source | Definition | First example listed | Building sites count after |
|---|---|---|---|
| OECD Model, Article 5 | A fixed place of business through which the business of an enterprise is wholly or partly carried on | Place of management | More than 12 months |
| Spain: Non-Residents Income Tax Law, article 13.1.a | Installations or workplaces of any kind used continuously or habitually, or an agent authorized to contract who habitually does so | Place of management (sede de dirección) | More than 6 months |
| Germany: Fiscal Code, section 12 | Any fixed business facility or installation that serves the company's activity | Place of management (Stätte der Geschäftsleitung) | More than 6 months |
Run a UAE free zone company or a BVI company from a home in Lisbon and Portugal can ask the same question. A US single-member LLC owned from abroad works the other way around: the US does not use the PE concept in its own law (KPMG), and an LLC owned by a non-US person who does all the work outside the US pays no US income tax, so its profit is taxed only where the owner lives.
Rules in the registry do not change any of this. Showing economic substance in the BVI or Cayman satisfies the registry's own law; it does not move the work out of your apartment. A holding company is not given a PE by owning a subsidiary abroad (Article 5(7)), but where its owner takes its decisions still counts, because a place of management heads the Article 5(2) list.
The same Estonian company, 2 founders
Works
Marta lives in Tallinn and runs her OÜ from an office there, where she signs client contracts and keeps the board minutes. Her 3 weeks of work from Lisbon in a year stay far below 50% of her working time (2025 update), and she signs nothing while she is there.
Fails
Jonas lives in Valencia all year, runs his OÜ from his apartment and signs every client contract there. Spain can treat the OÜ as managed from his apartment, which under Spanish law makes it a Spanish resident company (Corporate Income Tax Law, article 8.1.c), and at the least treat the apartment as a permanent establishment taxed on the profit attributed to it every year. Estonia's tax-free treatment of kept profit protects nothing.
How a permanent establishment is taxed
The country where the PE sits taxes the profit attributable to it under its own corporate tax (Article 7 of the OECD Model), so a PE swaps the registry's rate for the rate where the work is done. Spain taxes a PE at its corporate tax rates and adds 19% on profit the PE transfers abroad (Non-Residents Income Tax Law, article 19). The surcharge does not apply to a company resident in another EU country, or in a treaty country on reciprocal terms, so an Estonian OÜ run from Valencia escapes it and a BVI company does not.
When the owner does all of the work from one home, little profit is left to attribute anywhere else, and the company usually has to register and file a corporate return in that country as well as in its registry.
The PE taxes only the company. Whatever you take out is taxed again in your own hands, as salary or dividends, at the rates of the country where you are resident.
How to keep PE risk under control
Most of the facts that decide PE risk are yours to control: where you work, for how long, and where contracts are negotiated and signed.
Keeping a permanent establishment where you choose
- Decide which country you will work from most of the year, and treat it as the likely PE location or the place to form the company.
- Track your working days by country, and your share of working time at any home outside the company's country over every rolling 12 months.
- Negotiate and sign client contracts where the company is managed, and keep board decisions and minutes there.
- Keep short stays short: a few weeks of work from a second country rarely meets the permanence test, while the same months every year can.
- Read the treaty between the company's country and the country you work from, including any services PE clause, and that country's own PE definition.
- If a PE cannot be avoided, register it and file there rather than waiting for an audit to find it.
- Report what the company pays you, and its income where your country's CFC rules attribute it to you, in your own return every year; PE profit goes on the company's corporate return in the PE country.
David's note
If you will spend most of the next 2 years working from one country, I would stop looking for a way around a permanent establishment there. The real choice is between registering the PE and filing in 2 countries every year, or forming the company where you live, and for a one-person service business I would form it locally: one set of accounts, one tax authority and no argument over how much profit belongs to the PE. I would still choose any company abroad for banking and running cost, never for its rate.
