The Risks of Permanent Establishment

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Understanding the risks associated with permanent establishment (PE) is vital for any business operating internationally. With the rules governing PE becoming more stringent and the impact of the global pandemic complicating matters further, organisations must manage these risks effectively. 

Why is it Important for Your Business to Understand Permanent Establishment Risks?

The key to successful international business operations lies in understanding the concept of PE and the risks associated with it. The PE risks arise due to the potential tax liabilities when a business has a significant presence in a foreign country. These liabilities can be substantial, potentially threatening the financial health of your company. 

Understanding PE risks also helps companies strategize their global expansion while minimising their tax burdens. It helps in planning operations, structuring contracts and deciding where to locate employees, offices and other business assets.

Which Activities Can Trigger a PE Risk?

Various business activities can trigger a PE risk. They range from high-risk triggers such as establishing a physical presence in a foreign country to low-risk triggers like performing auxiliary or preparatory activities.

High-risk triggers

High-risk triggers typically involve having a substantial and continuous business presence in a foreign country. They can include the following:

1. Physical Presence: Owning or leasing office space, a factory or any kind of establishment in a foreign country can trigger PE risks.

2. Human Capital: Employees or agents conducting business on behalf of your company in a foreign jurisdiction can lead to PE risks.

3. Duration of Activity: If a project or business activity in a foreign country lasts for an extended period, it may lead to PE risks.

Low-risk triggers

Low-risk triggers usually involve lesser degrees of presence or shorter durations of business activity. They include:

1. Subcontracting: Having a third-party contractor perform some business activities in a foreign country may create PE risks, but they are often lower than if your employees were performing the activities.

2. Short-Term Projects: Shorter-duration projects or business activities may also create a PE risk, albeit less than longer-term ones.

Impact of Global Pandemic on PE Risk and Global Mobility

The global pandemic has drastically altered the business landscape, leading to increased remote work and restricted international travel. This has, in turn, complicated PE risk as tax jurisdictions may consider the temporary relocation of employees due to the pandemic as triggering PE risk. Companies must review their policies and contracts to manage these new risks.

Safeguard Your Organization From Permanent Establishment Risks

  1. Look for local tax advice

One of the best ways to safeguard against PE risks is to seek local tax advice in the foreign countries where you conduct business. Local tax experts understand the intricacies of their country’s tax law and can provide valuable insights to help mitigate risks.

  1. Establish a foreign subsidiary

Establishing a foreign subsidiary can help manage PE risks. This approach separates the parent company from the business activities in the foreign country, thereby reducing the likelihood of creating a PE for the parent company.

What are the Risks if a Permanent Establishment is Mismanaged?

Mismanagement of PE can lead to several risks including heavy financial penalties, double taxation, reputation damage and potential criminal charges. These risks make it critical for businesses to carefully plan, implement and monitor their foreign business activities to avoid any PE mismanagement.

Avoid the Risks of Permanent Establishment with Rapid

Rapid is India’s #1 employer of record (EOR) company that helps you onboard the country’s top tech talent without the hassle of compliances and approvals. With our deep expertise of 25 years in India, we help minimise your legal risk by ensuring compliance with local laws. 

We also handle payroll, benefits and tax compliance through our integrated HR platform. 

No hassles. No liabilities. 

With Rapid, you can set up your team in India at a fraction of the costs involved and onboard your employees within minutes. Our contracts are customised to adhere to local compliance standards. 

Along with our trusted partners, we offer curated and customised best-in-class health benefits and background verification services so that you can attract the cream of the crop. 

Our streamlined processes ensure that you receive a single invoice that you can pay in your own currency while your India employees get paid in their local currency. We also have a team of experts ready to assist you at the click of a button for any local, legal, accounting, or tax-related queries. 

Finally, our service marketplace helps you meet diverse workforce needs such as leasing workspaces, procuring IT assets, filing taxes, processing work visas, and so on. 

Join hands with Rapid to simplify employment, payroll, and compliance for your India unit so that you can focus on what matters most–GROWTH.


1. Can a single employee working remotely from a foreign country create a PE risk for my company?

A: Depending on the jurisdiction and the nature of the employee's work, this can potentially create a PE risk. 

2. Does virtual presence through digital platforms lead to PE?

A: The rules around digital PE are evolving, and it varies from country to country. It's always best to seek local tax advice.

3. What should I do if my business already has a potential PE exposure?

A: It's crucial to seek professional advice immediately. There may be mitigation strategies available, but early detection and intervention are key. 

4. Can frequent business trips to a foreign country create a PE risk?

A: Yes, if these trips involve performing business activities that are significant and continuous, they may create a PE risk.

5. Does establishing a foreign subsidiary always prevent a PE for the parent company?

A: Not necessarily. If the parent company is seen as effectively managing or controlling the subsidiary, it may still create a PE risk. This is why it's essential to ensure proper management and governance structures are in place.

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