Permanent Establishment and Remote Hiring: Does One Employee Abroad Create a Taxable Presence?

The short answer

One remote employee or contractor abroad does not automatically give your business a taxable presence in that country. A "permanent establishment" (PE) is a legal test used in tax treaties, and it is met only when specific conditions are present: a fixed place of business, a person who habitually concludes contracts for you, or, under some treaties, services supplied in the country for longer than a set number of days. A remote hire can meet one of those conditions, so the question is worth checking before the first contract is signed rather than after the first tax letter arrives.

This page is the plain-language companion to our glossary entry on permanent establishment risk. The glossary defines the term; this article walks through the tests, shows how a single remote worker can pass or fail them, and sets out practical controls. It is written for US small-business owners, but the reasoning applies to any company hiring across a border.

A PE is mainly a question about the country where the worker lives: does that country have the right to tax part of your company's profits? The OECD model is written symmetrically, referring to "a Contracting State" and "the other Contracting State", so the same Article 5 test applies to an enterprise of either country (OECD Model Tax Convention, Article 5).

What permanent establishment means in plain words

Most income tax treaties follow, to varying degrees, the OECD Model Tax Convention. Article 5 of the 2017 model defines a permanent establishment as "a fixed place of business through which the business of an enterprise is wholly or partly carried on" (OECD Model Tax Convention, condensed version 2017). In plainer words, it is a fixed place where your company does business in another country. The model lists examples such as a place of management, a branch, an office, a factory and a workshop. Three routes lead to a PE, and the questions you ask differ for each.

1. A fixed place of business

The place must be fixed, which the OECD commentary explains means it has "a certain degree of permanency", and your business must actually be carried on through it. The commentary notes that member countries have usually not treated a place as a PE where the business was carried on there for less than six months, while recording exceptions such as recurring activity (OECD 2017 commentary on Article 5). For a remote hire, the live question is whether the worker's home counts as your place of business.

2. A dependent agent who concludes contracts

You can have a PE with no office at all. Under Article 5(5) of the 2017 model, where a person acts in a country on your behalf and "habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification" by your business, you are deemed to have a PE there for the activities that person undertakes for you. The rule does not apply to an independent agent acting in the ordinary course of that business, and a person who works almost exclusively for closely related enterprises is not treated as independent (OECD Model Tax Convention, Article 5(5) and 5(6)). So the authority attached to a role matters more than the address: a salesperson who closes deals for you is a different case from a bookkeeper, developer or support agent who never commits your company to anything.

3. A services PE

The OECD model has no separate "services" clause, but some bilateral treaties do. The US Treasury's technical explanation of the 1989 convention with India says that treaty treats furnishing services through employees or other personnel as creating a PE if the activity continues for an aggregate of more than 90 days in a twelve-month period, or if the services are performed for a related person, and adds that under the US model such activities would create a PE only through a fixed place of business or a dependent agent (Treasury technical explanation, US-India convention). It is a 1989 document, so treat it as an illustration of how treaties differ and check the current text.

Can one remote employee create a PE?

Yes in principle, and no in many ordinary cases. Three factors do most of the work: the home office, the authority to conclude contracts, and duration.

The home office

On 18 November 2025 the OECD Council adopted an update to its model that added new commentary on people who work for an enterprise from a home or other place in another country. It says the mere fact that a place is used by an employee for the business "should not lead to the automatic conclusion" that it is a place of business of the enterprise (OECD, The 2025 Update to the OECD Model Tax Convention, Commentary on Article 5, paragraphs 44.1 to 44.6). Three law-firm summaries describe the same approach (DLA Piper; Aird & Berlis; Binder Grösswang). The primary text says:

• A home would generally not be considered a place of business of the enterprise if the individual worked from it for less than 50 per cent of their total working time for that enterprise over a twelve-month period (paragraph 44.8).
• At 50 per cent or more, the outcome depends on the facts, and "a prominent consideration" is whether there is a commercial reason for the person to carry out the activities in that country (paragraphs 44.10 and 44.11).
• A commercial reason is described as existing where the person's physical presence in that country itself facilitates the business, for example meetings with customers there, or real-time interaction with customers in different time zones such as call centre services or virtual IT support (paragraph 44.17).
• It is not present where the enterprise allows home working solely to obtain or retain the person's services or to reduce costs such as office space (paragraphs 44.15 and 44.16). A different time zone, or the mere presence of customers in that country, does not by itself lead to the conclusion that one exists (paragraph 44.18).

The commentary gives worked examples. An employee who works from home in the other country for 30 per cent of her working time does not create a PE absent other facts. An employee who works almost exclusively from home in the other country, giving virtual services to customers in the employer's country and in other time zones so that she is available around the clock, is concluded to have a home that is a place of business of the employer and a fixed-place PE absent other facts (OECD 2025 Update, paragraph 44.21, Examples B and E).

The commentary also says a contract or workplace policy helps in working out working time only to the extent it matches what the individual actually does (paragraph 44.9), so a contract line that says the person works from the employer's office will not help if they work from home every day.

Authority to conclude contracts

The second factor is what the person can bind you to. A support agent, designer or accountant who works from instructions and does not negotiate or finalise contracts generally sits outside the dependent-agent rule. A sales lead or business-development hire is the person the OECD wording ("principal role leading to the conclusion of contracts") is aimed at. Treaties differ: the US-Mexico convention uses an older formulation that deems a PE where a person "has and habitually exercises" in the country an authority to conclude contracts in the name of the enterprise (US-Mexico income tax convention, Article 5(5)), which does not mention the "principal role" limb of the 2017 OECD wording.

Duration

The third factor is time. The 2025 commentary's Example A describes an employee who works from a rented place in the other country for three consecutive months after a holiday and concludes that the place is not fixed, because it lacks permanence (OECD 2025 Update, paragraph 44.21, Example A). A hire who lives in the country and works there every week of the year is a different matter. For services PEs, treaty day-counts such as the 90-day test in the US-India example apply.

Employees, contractors and an employer of record

Business owners often assume the way they engage a worker settles the PE question. In general it does not, because the PE tests look at what happens in the country, not at the label on the contract. Employment-law tests are separate; see worker misclassification and contractors vs employees.

A direct employee's activities are your activities, so the home-office, authority and duration questions all apply. An independent contractor may fall within the independent-agent exception to the dependent-agent rule, but the exception falls away if the person acts exclusively or almost exclusively for closely related enterprises (OECD Model Tax Convention, Article 5(6)). In our reading, a contractor who in practice works full-time on your systems and under your direction is a weaker candidate for that exception, though the treaty text turns on its own wording and the facts. The contractor label also does not displace the worker's country's classification rules; see EOR vs contractor.

An employer of record (EOR) becomes the legal employer in the worker's country and runs payroll, contributions and employment compliance. On PE, be careful what you assume. The OECD text we checked asks whether your enterprise carries on its business through a fixed place, or through a person who habitually concludes contracts for you, and it does not state that routing employment through an intermediary removes those tests. An EOR changes who the employer is, who files payroll returns and who answers for local employment law. It does not change the facts about what the person does for your business. For costs, see employer of record cost in 2026 and the wider remote hiring compliance guide.

Employers who prefer to register their own subsidiary can read our glossary entry on a local entity.

Treaty rules versus domestic law

Whether a PE exists depends on two layers: the tax treaty, if any, between the United States and the worker's country, and that country's domestic law. The IRS describes the idea from the US side, for foreign residents' US-source income: treaties may reduce or exempt some taxes, and where no treaty applies the ordinary domestic rules apply (IRS, Tax treaties). Our reading is that the same two layers apply in the worker's country. So ask an adviser first whether the US has a treaty with the country, and second what its permanent establishment article says.

Treaties are not identical. The IRS describes "permanent establishment" generally as a fixed place of business such as a place of management, a branch, an office, a factory, a warehouse or a mining site, and says the exact meaning is set by each treaty (IRS Publication 901, U.S. Tax Treaties (09/2024)). The India and Mexico examples show it: one adds a time-based services test and the other uses a narrower contract-authority wording than the OECD model. Countries can also reserve positions; the 2017 commentary records that Estonia and Mexico reserve the right to tax individuals performing independent professional services if they are present in these States for more than 183 days in any twelve-month period (OECD 2017 commentary on Article 5, positions).

Notes for the countries our guides cover

We have hiring guides for sixteen countries. We checked primary sources only where they were available, and say plainly where we did not. The general rule is the same everywhere: read the specific treaty and take local advice.

India. According to the Treasury's technical explanation of the 1989 convention, the US-India article differs from the US and OECD models by requiring a lesser connection with the country before a PE exists. A building site or installation project must last more than 120 days in a twelve-month period, and furnishing services creates a PE after more than 90 days in a twelve-month period or if performed for a related person (Treasury technical explanation, US-India convention). Check the current treaty text and see our India hiring guide.

Mexico. The US-Mexico convention (signed 1992) defines a PE as a fixed place of business, counts a building site or similar project only if it lasts more than six months, and deems a PE where a person who is not an independent agent has and habitually exercises authority to conclude contracts in the enterprise's name (US-Mexico income tax convention, Article 5). See our Mexico hiring guide.

The other fourteen. IRS Publication 901 (September 2024) includes country discussions for the Philippines, Egypt, Pakistan, Poland, Romania, South Africa and Ukraine as well as India and Mexico. Argentina, Brazil, Colombia, Costa Rica, Kenya, Nigeria and Vietnam do not appear in its discussions (IRS Publication 901). That describes what the publication covers, not whether a treaty exists or applies, so confirm treaty status with your adviser. We did not retrieve a tax authority page for these countries, so we do not summarise their domestic PE rules. See the Philippines hiring guide and the other country guides.

Practical controls for a small business

None of these guarantees a tax outcome. They follow from the tests above and make your position easier to explain if a tax authority asks.

• Decide the role's authority before you hire, and say in the job description and contract whether the person may negotiate, sign or finalise contracts.
• Keep signing authority at home. Have customer contracts approved and signed by someone in your home country, and avoid titles such as "country manager" for roles without real authority.
• Be aware of what makes a home look like your place of business. The 2025 commentary says the mere use of a home by an employee does not automatically make it a place of business of the enterprise (paragraph 44.6), while use on a continuous basis during an extended period may indicate that it is (paragraph 44.7). As our own caution, not a point from the commentary, keep a note of why any arrangement such as paying for a home office exists, so you can explain it if asked.
• Write the contract to match reality, describing where the person works and who chose the location, since the commentary gives weight to actual conduct.
• Keep a working-days record of where each worker is based and travels, which helps with the 50 per cent benchmark and treaty day-counts.
• Review when the role changes, for example when a support hire starts closing deals or a contractor becomes full-time and exclusive. Our guide to how to hire remote employees sets out the engagement options, and paying international contractors covers the payment side.

When to get advice

Get a written view from an international tax adviser before you hire if any of these apply:

• The role involves selling, negotiating or finalising contracts with customers in the worker's country or region.
• The worker will work almost exclusively from home and serve your customers in real time, the pattern in Example E of the OECD commentary.
• You plan more than one hire in the same country, or are considering renting an office, desk or storage space there.
• The worker is a senior manager, or can direct other staff or sign for the business.
• A tax authority has written to you, or a customer, bank or investor has asked about your foreign activities.

An adviser can read the actual treaty and local law and tell you whether to register, seek a ruling or restructure the engagement. For a single back-office hire who will not negotiate your contracts, it is still worth having the conclusion in writing.

Sources

The legal statements above are drawn from these pages. The OECD and government documents are primary sources; law-firm pages are summaries.

• OECD, Model Tax Convention on Income and on Capital: Condensed Version 2017 (primary)
• OECD, The 2025 Update to the OECD Model Tax Convention (primary; adopted by the OECD Council on 18 November 2025)
• IRS, Tax treaties (primary)
• IRS, Publication 901 (09/2024), U.S. Tax Treaties (primary)
• US Treasury, Technical explanation of the US-India convention (1989) (primary; hosted by the IRS)
• United States-Mexico income tax convention (1992) (primary treaty text; hosted by the IRS)
• DLA Piper, OECD's 2025 Model Tax Convention update (law-firm summary)
• Aird & Berlis, Permanent establishment and remote work: updated OECD guidance (law-firm summary)
• Binder Grösswang, Update to the OECD Model Tax Convention clarifies home office permanent establishments (law-firm summary)

References checked on 31 October 2026. This article is general information only and is not tax or legal advice. Treaties and domestic laws change, so confirm the current position with a qualified adviser before acting.