Permanent Establishment
A legal and tax concept that determines whether a foreign company is considered to have a taxable presence in another country.
What is Permanent Establishment?
Permanent Establishment (PE) is a legal and tax concept that determines whether a foreign company is considered to have a taxable presence in another country. If your company hires workers, signs contracts, or generates income in a country without a legal entity, you could unknowingly trigger a PE - making your company liable for corporate taxes, audits, and compliance obligations in that jurisdiction.
How it works
- Each country has its own PE rules (often based on OECD standards), but common triggers include:
- Hiring full-time employees locally
- Giving contractors long-term assignments with managerial control
- Having sales agents or reps who close deals on your behalf
- Using local offices, warehouses, or coworking spaces as "fixed presence"
- Exceeding a time or revenue threshold in one country
- For example:
- In Germany, PE can be triggered if a contractor works long-term for you without clear independence.
- In India, signing client contracts locally via a sales rep can create a PE.
- Sigma helps companies identify PE risks early and recommend EOR or CoR models to prevent exposure.
Why it matters
- If you create a PE without realizing it, the consequences can be serious:
- Corporate income tax in the host country
- Fines for late or missing tax filings
- Ineligibility for tax treaties or local business advantages
- Investigation of your entire team structure and past activity
- For startups and remote-first teams hiring globally, PE is the #1 hidden risk when expanding without legal or tax infrastructure.
Example
A U.S. SaaS company hires three engineers in Mexico on long-term contracts and gives them company email addresses, fixed working hours, and local client-facing tasks. Mexico's tax authority audits the team and determines the company has created a Permanent Establishment, requiring back taxes and legal filings. By switching to Sigma's EOR model, the risk is resolved and payroll remains compliant.
