Permanent establishment (PE) is the tax concept that keeps CFOs up at night when their companies hire internationally. If your company’s activities in a foreign country cross a defined threshold — a fixed office, a dependent agent signing contracts, or sustained business operations — that country gains the right to tax your corporate profits as if you had a local entity. The tax bill isn’t trivial: German corporate tax is roughly 30%, India’s effective rate is around 25%, and Australia charges 30% for foreign companies. These apply to profits attributable to the PE, but tax authorities interpret attribution broadly.
PE triggers fall into two main categories under the OECD Model Tax Convention. A fixed place PE arises from offices, warehouses, or other physical locations where business is conducted continuously. A dependent agent PE arises when someone habitually exercises authority to conclude contracts on behalf of your company. That second category is where remote employees create risk. A sales executive in Germany who negotiates deals and signs agreements on your behalf can trigger a dependent agent PE. An engineer writing code from their apartment in Bangalore almost certainly does not.
The distinction matters because it shapes which roles you can safely hire through an EOR versus which roles should sit in your own local entity. Back-office, engineering, design, support — these carry minimal PE risk. Sales, business development, executives with signing authority — these are the roles that tax authorities scrutinize.
Some countries are more aggressive than others. India’s tax authorities have a history of asserting PE status in situations other countries would not. Australia’s dependent agent rules are strict and well-enforced. Germany applies the “fixed place of business” concept broadly. The US has its own framework that differs from the OECD model, with “effectively connected income” rules that can catch foreign companies off guard.
Why It Matters for EOR
Using an EOR generally reduces PE risk because the EOR — not your company — is the legal employer with the local presence. Your company has no registered entity, no office, and no dependent agent in-country. The employee works for the EOR on paper, even though they work for you in practice.
But this isn’t an absolute shield. Tax authorities in Germany, Australia, and India have scrutinized EOR arrangements where the employee’s activities resemble those of a company representative. If your EOR-employed worker negotiates contracts, commits your company to obligations, maintains a fixed office in your company’s name, or represents your company at government meetings, the PE protection weakens. The EOR legal structure doesn’t override the substance of the economic activity.
The safe approach: limit EOR-employed roles to functions that clearly don’t trigger PE — engineering, product, design, operations, support. For sales-facing roles in high-scrutiny jurisdictions, either structure the role carefully (no signing authority, no contract negotiation) or set up your own entity. Ask your EOR provider — Deel, Remote, or whoever you’re evaluating — how they advise on PE risk for each role type. If the answer is “that’s not our area,” you need a cross-border tax advisor alongside your EOR.
A related concept: contractor misclassification can also trigger PE exposure. If a country reclassifies your “independent contractor” as an employee, the argument that you have no local employment relationship — and therefore no PE — collapses. Getting the classification right eliminates two risks at once.
For practical use of this concept, see EOR vs PEO explained and remote jobs by country.
Further Reading
- EOR vs. local entity: when each option makes sense — Compares the PE risk profile of EOR arrangements against setting up your own subsidiary.
- Hiring in Germany: employment law, taxes, and PE considerations — Germany is one of the most aggressive jurisdictions on PE enforcement, with specific rules worth understanding.
- EOR comparisons
- Read Deel review
- EOR vs PEO explained
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