Permanent Establishment Risks of Employee Travel: A 2026 Guide

A decade ago, permanent establishment (PE) risk was a concern for multinationals with factories and subsidiaries abroad. Today, it is a daily operational threat for any company with employees who cross borders, whether for a six-month remote arrangement or an executive attending a series of client meetings.

Permanent establishment is a legal concept in tax law that defines when a company has a taxable presence in a foreign country. No formal subsidiary is required. A single employee, working from a home office or co-working space in the wrong jurisdiction for too long, can create obligations for corporate income tax, payroll filings, and penalties, none of which the company planned for.

The stakes rose further in November 2025, when the OECD released its first major update to the Model Tax Convention since 2017. The update directly addresses remote work, workations, and mobile executives. For HR and global mobility teams, this is not a future concern.

The Cost of Getting It Wrong

The financial and operational consequences of an accidental PE are severe:

• Corporate income tax of 20% to 35% on profits attributed to the foreign presence, applied retroactively.
• Unexpected payroll tax burdens, including social insurance contributions, filed in a jurisdiction where you have no infrastructure.
• Legal and professional fees which routinely reach five figures per case, before the dispute is even resolved.
• Reputational damage from being flagged by a foreign tax authority for undeclared business activity.

These consequences do not require malicious intent. Most PE cases begin with a well-meaning flexible work policy or an executive who spends more time in a market than anyone tracked.

The 2025 OECD Framework: What Changed

The November 2025 update expands the Commentary on Article 5 of the OECD Model Tax Convention. The core change: tax authorities now have clear guidance for assessing whether an employee’s home, holiday rental, or secondary location constitutes a fixed place of business for their employer.

The update introduces a two-part test.

Test 1: The Temporal Test (The 50% Rule)

If an employee works from a non-company location in a foreign country for less than 50% of their total working time over any twelve-month period, that location generally does not create a PE for the employer. This acts as a safe harbour for most short-term remote and workation scenarios.

Key benchmark: Below 50% of working time in a foreign location → Generally, no PE risk from that location.

Test 2: The Commercial Reason Test

If the employee exceeds the 50% threshold, the analysis shifts. Tax authorities will ask: Is this presence driven by a business need, or by the employee’s personal preference?

• Business-driven presence (e.g., serving local clients, accessing local expertise) → Higher PE risk.
• Lifestyle-driven presence (e.g., personal choice, talent retention flexibility) → Lower PE risk, even above the 50% threshold.

How Employee Travel Accidentally Creates a PE

There are three primary routes by which business travel crosses the PE threshold.

1. Fixed Place of Business

A fixed place PE is created when an employee regularly works from a location that the company is deemed to “have at its disposal”. This goes beyond company offices. It includes:

• Home offices, particularly where the employer requires the employee to work from home in that country.
• Co-working spaces used on a regular basis.
• Hotel rooms that serve as a consistent operational base during extended trips.

The critical factor is not who owns the space, but whether the company effectively controls its use for business purposes. If a company provides no other workspace and an employee must operate from home in a foreign country, that home office may be “at the disposal” of the employer.

2. Dependent Agent PE

This is the highest-value risk for most global mobility teams. A PE is created when an employee habitually concludes or negotiates contracts in the name of the company while in a foreign jurisdiction.

The risk applies even during short visits. If a senior executive travels to a country for three days and signs a major service agreement, a dependent agent PE may exist regardless of how brief the stay was. The act, not the duration, is determinative.

3. Service PE

Many tax treaties contain a “Service PE” clause triggered when employees collectively spend more than a threshold number of days – commonly 90 or 183 – providing services in a country. The key compliance challenge: these thresholds aggregate across multiple employees. Two consultants in-country for 60 days each can trigger a 120-day combined exposure.

Jurisdictional Case Studies: 2025–2026

United Kingdom

HMRC’s default position is firm: PAYE withholding applies to all international employees from day one of any UK work. The primary relief mechanism is the Short-Term Business Visitor Agreement (Appendix 4), available to companies that proactively apply to HMRC before employees arrive.

Under Appendix 4, PAYE is not due for visits under 60 days, provided the employee is covered by a Double Taxation Agreement, and costs are not recharged to a UK entity. However, this relief is not automatic; the agreement must be formally secured, and records must be maintained.

• The 60-day rule: Visits under 60 days are exempt from PAYE under Appendix 4, but only with the agreement in place.
• Linked periods: HMRC can aggregate a pattern of short visits. Ten days per month, viewed collectively, may constitute substantial presence.
• Non-resident directors: Explicitly excluded from STBV agreements. Board duties in the UK require a separate PAYE analysis.
• Technology risk: The EU Entry/Exit System and UK Electronic Travel Authorisation now give HMRC automated access to border crossing data. Manual tracking is no longer sufficient.

United States

The IRS uses a weighted three-year calculation to determine residency. Days in the current year count in full; days in the preceding year count as one-third; days in the year before that count as one-sixth. If the total reaches 183, the individual is treated as a US resident, triggering worldwide taxation.

For foreign corporations, even sub-threshold activity may create a taxable US trade or business if the employees’ work generates “effectively connected income.”

A critical and often overlooked tool: the Protective Return (Form 1120-F). Even if a foreign company believes it has no US tax liability, filing Form 1120-F preserves the right to claim deductions if the IRS later disagrees. Without it, the company may be taxed on gross income with no expense relief.

India

India is one of the most litigious PE environments globally. However, the Delhi High Court’s December 2025 ruling in CIT v. Clifford Chance Pte Ltd. provides important protection for companies providing services remotely.

The court ruled that physical presence in India is a mandatory precondition for a Service PE under the India-Singapore tax treaty. Virtual or digital service delivery alone does not create a PE. This directly rejected the Revenue Department’s push for a “virtual PE” concept.

The court also clarified the 90-day Service PE threshold:

• Vacation days and business development days do not count toward the 90-day limit.
• Two employees present on the same day count as one day, not two (solar days, not man-days).

Despite this ruling, India remains high-risk for fixed-place PEs. Indian tax officers routinely examine hotel rooms, shared workspaces, and affiliate offices for evidence of a “right of use” by the foreign company.

How to Reduce Permanent Establishment Risk: HR Policy Guardrails

Policy design is the first line of defence. The following measures have become standard practice for compliance-focused global mobility programs.

Move from “Work from Anywhere” to “Work from Pre-Approved Countries”

Blanket WFA policies, announced without tax consultation, are a primary source of PE exposure. Replace them with a defined list of approved jurisdictions where the company has assessed and accepted the risk level.

Implement Hard Day Caps

Set clear, enforceable limits on international remote work, typically 20 to 30 days per year for most employees, and lower thresholds for executives with signing authority. These caps should apply per country, not globally, to avoid aggregation risks.

Introduce Signing Blackouts

Prohibit travelling employees from executing, negotiating, or signing contracts while physically present in high-risk jurisdictions. Document that all significant decisions and contract executions occur in the home jurisdiction.

Build a Mandatory Pre-Approval Process

Require a formal request-and-review process before any cross-border remote work begins. A 30-day authorisation window gives tax and legal teams time to assess jurisdiction-specific risks before exposure starts.

The Technology Stack: Tools for Modern Compliance

The complexity of multi-jurisdiction tracking has made manual spreadsheets a liability. The 2025 global mobility software market offers purpose-built tools that automate the most error-prone elements of compliance.

These platforms matter for two reasons. First, they reduce human error in tracking, the most common cause of compliance failure. Second, they generate the verified audit trail that authorities like HMRC increasingly expect to see during an inquiry. Self-reported spreadsheets will not satisfy a formal investigation.

Moving to Proactive Governance

Permanent establishment risk has moved from the balance sheet footnotes into daily HR operations. The 2025 OECD update, combined with tighter enforcement infrastructure in the UK, US, and India, means that informal arrangements and good intentions are no longer adequate protection.

The organisations that manage this well share three traits: they have written policies with enforceable day caps, they use technology to track actual – not just planned – movements, and they treat senior executive travel with the same scrutiny as mass mobility programs.

The immediate actions for any global mobility team are:

• Review your current remote work policy against the 2025 OECD 50% temporal benchmark and commercial reason test.
• Audit the travel patterns of founders and C-suite executives for dependent agent PE exposure.
• Confirm that Appendix 4 (UK) or equivalent agreements are in place before employees travel, not after.
• File protective returns (Form 1120-F) in the US wherever there is any ambiguity about business activity levels.
• Deploy a tracking platform that produces a verified, jurisdiction-level day count for every employee.

Centuro Global works with organisations to design and implement global mobility compliance programs. Contact us to review your existing policies against the 2025–2026 regulatory landscape.