When Work Crosses Borders, Tax Does Too Unless Businesses Dodge The Risk

Global business has become more mobile than ever before. A single company can now operate with its headquarters in New York, development teams in Bangalore, and sales representatives traveling throughout Europe. The rise of hybrid and remote work trends has further amplified this borderless reality. However, behind this seemingly smooth operation lies a complicated tax landscape: the risk of unintentionally establishing a Permanent Establishment (PE) in a foreign country.

For numerous businesses, the threat does not stem from extensive branch offices or manufacturing facilities, it arises from something much more nuanced. An individual employee working in another country for an extended period can trigger a taxable presence according to domestic laws or tax treaties. The outcome? A laptop abroad would become the most expensive office as now it's exposed to corporate income tax, compliance responsibilities, and potentially hefty penalties.

This article examines how PE risks emerge from employees working abroad, the shifting global standards, and the strategies companies can implement to reduce unintended tax liabilities.

Beyond Brick and Mortar

At its essence, permanent establishment serves as a fundamental principle in international tax law, determining when a business has a sufficient presence in a foreign nation to incur local corporate taxation¹. Grounded in frameworks such as the OECD Model Tax Convention, PE generally occurs when a company operates a "fixed place of business" from which it conducts revenue-generating activities. This concept extends beyond physical offices; it can include any stable arrangement where essential operations take place. Tax treaties between nations often clarify this definition, yet local regulations ultimately prevail. For example, under numerous agreements, activities classified as "preparatory or auxiliary" including market research or administrative support typically do not establish PE. However, if these activities evolve into revenue-generating efforts, such as negotiating contracts or overseeing sales, the distinction becomes ambiguous, and tax authorities may intervene. Essentially, PE converts a transient international presence into a taxable establishment, assigning profits to the foreign jurisdiction and requiring companies to submit tax returns, pay taxes, and adhere to local laws.

How Employees Trigger PE

The emergence of remote and hybrid work arrangements has heightened permanent establishment (PE) risks², as employees dispersed across countries can unintentionally create a company's presence. Here are the key risk scenarios:

• Fixed Place of Business PE: If an employee utilises a stable location overseas, whether it's a home office, co-working space, or even a client's location for business activities, it may be regarded as a fixed place. Elements such as the company covering home office costs or utilising that address for official communications increase the risk. In the post-pandemic world, tax authorities have examined cross-border home offices with greater scrutiny, particularly when they involve critical decision-making.
• Dependent Agent PE: Employees or contractors serving as agents who regularly finalise contracts or exercise binding authority on behalf of the company can establish PE. This risk escalates if the agent relies financially on the company and is primarily committed to its interests. Even part-time positions, such as a sales representative negotiating contracts during brief visits, may suffice if they occur frequently.
• Service PE: Extended service provision overseas, often surpassing 183 days within a 12-month timeframe, triggers this category. Consulting, engineering, or management services come under scrutiny, with the threshold differing by nation and treaty. Short-term assignments lasting 3-5 months can still present risks if not managed with caution.

Global Shift and PE Risks

The OECD's Base Erosion and Profit Shifting (BEPS) Project has strengthened Permanent Establishment (PE) standards across various jurisdictions. Specifically, BEPS Action 7 tackles the artificial avoidance of PE status, ensuring that companies cannot evade taxation simply by fragmenting their operations or relying on rigid structures³. Numerous countries have embraced broader interpretations of "dependent agent" and "fixed place of business", effectively closing loopholes that previously enabled multinational enterprises to operate unnoticed. Consequently, enterprises now face increased scrutiny when employees or representatives abroad play a significant role in revenue generation.

The acknowledgment of a Permanent Establishment through overseas employees presents both legal and commercial hurdles. Once a PE is recognised, the business becomes responsible for corporate income tax in the host country, requiring that profits be allocated locally. This situation often ignites discussions with tax authorities regarding the appropriate allocation of income, rendering transfer pricing and profit distribution particularly contentious.

Apart from income tax, a PE can also trigger additional fiscal responsibilities such as the need for VAT or GST registration and the enforcement of withholding taxes on transactions between the headquarters and the deemed establishment. These indirect liabilities can significantly increase the overall expense of conducting business.

The burden of compliance is equally considerable. Firms may need to register with local tax administrations, keep financial records, undergo audits, and submit returns, occasionally in languages and formats that may be unfamiliar to their internal teams. Non-compliance can result in penalties, interest, and in some regions, personal liability for directors.

Beyond the numerical implications, there is a more extensive commercial effect. Tax disputes or investigations can postpone transactions, complicate financing, and raise issues during investor due diligence. The reputational harm from being viewed as non-compliant can diminish client trust, especially in markets where regulatory integrity is crucial for securing contracts. Therefore, the repercussions of an unintentional PE extend well beyond mere tax obligations as they can hinder growth, investment, and long-term strategic positioning.

Effective Approach to Manage Risks

Proactive management is essential for steering clear of PE pitfalls. Here are practical strategies rooted in established best practices:

• Conduct Comprehensive Risk Evaluations: Prior to sending employees overseas, assess activities in light of local tax regulations and treaties. Utilise checklists to monitor durations, scopes, and locations, identifying key thresholds such as the 183-day rule. Foster collaboration among HR, tax, and legal teams to oversee assignments and maintain documentation that substantiates activities are supplementary.
• Restrict Employee Authority and Duration: Limit foreign assignments to non-binding roles, ensuring contracts are executed domestically. Keep stays under critical thresholds and rotate personnel to prevent a habitual presence. In remote arrangements, refrain from financing home offices or officially using foreign addresses.
• Utilise Employer of Record (EOR) Services: Collaborate with an EOR to employ staff in compliance without direct PE exposure. The EOR manages payroll, taxes, and contracts, serving as the local employer while your company retains operational oversight. Engage Independent Agents: Employ contractors or agents who lack the authority to legally bind the company, thereby mitigating dependent agent risks. Ensure they are not solely connected to your business to uphold their independence.
• Create Local Entities When Necessary: For ongoing operations, establishing a subsidiary formalises your presence and facilitates structured tax planning. This transition shifts from mere avoidance to managed compliance, making it suitable for long-term growth.

Real World Scenarios

Real cases underscore the intricacies of Permanent Establishment (PE). In Progress Rail Locomotive Inc. v. India (Caterpillar case)⁴, the Delhi High Court determined that no PE was present since the subsidiary's operations were merely preparatory, lacking finalised contracts or control over the premises. In contrast, in Hyatt International Southwest Asia Ltd. v. Additional Director of Income Tax (2025)⁵, the Indian Supreme Court found that Hyatt's substantial operational control over Indian hotels through frequent employee visits and strategic management resulted in a fixed place PE, even in the absence of a formal office, thereby rendering its income subject to taxation. These decisions highlight that tax authorities tend to favour economic substance over legal structure, closely examining the realities of operations.

Looking Forward This Evolving Landscape

As hybrid work solidifies its status as a lasting norm, the friction between global mobility and tax sovereignty is set to escalate. Jurisdictions are becoming increasingly aware of the financial repercussions stemming from remote work, and we can anticipate a rise in assertive enforcement and litigation concerning permanent establishment (PE) attribution.

In addition, the digital economy is progressively blurring the lines of physical presence thresholds. Initiatives like Pillar One of the OECD's global tax reform may ultimately transform the concept of nexus entirely; however, until that happens, the conventional PE framework continues to be the primary factor influencing tax risk.

Global companies flourish on adaptability, talent mobility, and cross-border operations. Yet, in this new work paradigm, even a single employee working abroad can generate more than just operational efficiency as they can also incur a tax obligation. The notion of Permanent Establishment, once linked to tangible infrastructure, now extends the intricacies of employee roles and digital traces.

Businesses that strategically manage mobility policies, grasp jurisdictional subtleties, and synchronise legal considerations with business strategies will be optimally equipped to traverse this changing landscape. The aim is not to limit movement, but to guarantee that global growth does not incur unforeseen tax expenses.

Footnotes

1. Briefing, I. (2023, November 28). Permanent establishment in international taxation and Indian tax law. India Briefing News.

2. KPMG International, Home. (2024, September 30). EU – remote working and corporate taxation. KPMG.

3. OECD. (2015). Preventing the artificial avoidance of permanent establishment status [Report]. OECD Publishing.

4. Taxmann. (2024, June 4). Delhi HC rules "Progress Rail Locomotive Inc." lacks permanent establishment in India

5. Beyond Borders: Apex Courts Hyatt Verdict Redraws Global Tax Map.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.