A permanent establishment (PE) is a fixed place of business or deemed presence through which an enterprise carries on business in a foreign country, thereby creating a taxable nexus in that country. The PE concept determines whether a country can tax the profits of a non-resident enterprise attributable to its activities there.
PE provisions in India's DTAAs and Section 9 of the Income Tax Act 1961 (business connection). India has adopted BEPS Action 7 PE anti-avoidance rules in most of its tax treaties via the MLI. Virtual PEs (significant economic presence) introduced via Equalisation Levy and Section 9(1)(i) amendments.
Article 5 of the OECD Model Tax Convention defines PE. BEPS Action 7 expanded PE definition to counter artificial avoidance (commissionnaire arrangements, specific activity exemptions). The 2017 OECD Model extensively revised Article 5.
TIOPA 2010 and UK DTAAs determine PE. HMRC actively audits PE risks for tech companies and temporary secondments.
If employees work remotely from their home country for a foreign employer's benefit, they may create a fixed place PE or agency PE in their home country. Post-COVID, many countries issued guidance. India has not issued specific guidance, creating uncertainty for cross-border remote work arrangements.
An agency PE arises when a dependent agent (not an independent agent) habitually concludes contracts or plays the principal role in concluding contracts on behalf of a non-resident enterprise. Following BEPS Action 7, the test now covers concluding contracts for the transfer of property or provision of services, not just sales contracts.
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