Permanent establishment risk: 3 questions to ask before approving a remote hire

Why remote work heightens permanent‑establishment risk

The rise of distributed and remote work has blurred the lines between where a business operates and where its people live. Hiring a sales representative in Paris or a software engineer in Berlin without opening a local office can help you access talent quickly, but it can also trigger a permanent establishment (PE) under tax laws. 

A PE is generally defined as a fixed place of business or certain kinds of ongoing activity in a country that gives that country the right to tax the company’s profits. When an employee generates revenue, signs contracts or works habitually from a specific location, tax authorities may conclude that the employer has a taxable presence. The stakes are high: PE status can expose a company to corporate income tax, local employment obligations and even back‑dated penalties.

At Jackson & Frank, we help clients navigate global hiring and compliance. One of the first steps we take when assessing a new remote hire is to ask three simple questions. These questions are based on the most common triggers tax authorities look for and are grounded in guidance from international treaties and our own experience.

The three‑question PE screen

1. Will the worker sign or negotiate contracts on behalf of the company?

Granting an employee authority to negotiate or conclude contracts abroad is one of the clearest PE triggers. Tax authorities see contract authority as creating a “dependent agent” who effectively represents the company locally. Even if the employee doesn’t physically sign contracts, regular negotiation or approval authority can be enough. Consider limiting signing authority for remote staff or ensuring contracts are executed by headquarters where appropriate.

2. Are they generating core revenue from a fixed location?

Another common trigger is when an employee carries out revenue‑generating activities sales, account management or product delivery, habitually from a specific location. If a remote worker is effectively running a branch of your business by meeting clients, closing deals or delivering services in one country, tax authorities may view that location as a PE. Tasks that are preparatory or auxiliary (e.g., market research) are generally safer, but any persistent income‑generating activity should be carefully assessed.

3. Is the role habitual and ongoing for your business?

Time matters. International tax treaties often include a threshold for how long a foreign activity can last before it constitutes a PE. A short‑term project might be exempt, but a long‑term or habitual presence (for example, more than six months in a twelve‑month period) could create exposure. Employees who become integrated into the local business community, manage local teams or repeatedly work in the same location increase the risk further. Documenting the intended duration and nature of each remote engagement helps in any later discussions with tax authorities.

These questions aren’t exhaustive, but they offer a pragmatic way to flag potential risk early. If the answer is “yes” to one or more, it’s time for deeper analysis.

Best practices to manage PE risk

1. Use an Employer of Record (EOR) for speed and compliance. An EOR is a third‑party service that hires workers on your behalf. It becomes the legal employer in the worker’s country, handling payroll, taxes and employment law compliance. By interposing an EOR, you reduce the likelihood that your core business activities will be deemed to create a PE. This is particularly useful for testing new markets or hiring a few individuals.
2. Clarify remote‑work policies and responsibilities. Remote employees should understand what they can and cannot do. For example, they should not sign contracts or negotiate key terms without approval from headquarters. Provide written policies specifying roles and reporting structures.
3. Monitor duration and activities. Track how long remote employees spend in each country and what they do there. Many tax treaties use a 183‑day threshold for establishing tax residence or PE. Keeping accurate records can help demonstrate compliance or support exemption claims.
4. Seek professional advice early. The specifics of PE rules vary by country and by double‑tax treaty. When in doubt, consult local tax and legal advisors. A misinterpretation can lead to back taxes, interest and penalties.
5. Educate and document. Train managers and employees about PE risk. Keep documentation of contracts, job descriptions and communications that clarify each worker’s responsibilities.

Real‑world example: Sales manager in Germany

Imagine a U.S. software company with a single salesperson in Germany. She works from her home office, meets clients at their sites and has the authority to negotiate subscription agreements. She has been in the role for 18 months and closes deals on behalf of the company.

PE triggers: She signs and negotiates contracts, generating revenue and working habitually in Germany. Under most tax treaties, these activities would likely create a PE. The company may owe German corporate income tax and need to register with local authorities. By contrast, if the salesperson were hired through an EOR and limited to lead generation and product demos, contract finalisation and invoicing could be handled by the U.S. entity, reducing the risk.

Conclusion

Hiring talent around the world can accelerate growth, but it also introduces new risks. Permanent establishment risk is one of the most significant yet it is manageable with the right processes. By asking three simple questions before each remote hire, you can quickly spot situations that warrant a deeper review and take steps to stay compliant. Whether you use an Employer of Record, set up a local subsidiary or adjust job responsibilities, proactive planning reduces the likelihood of unpleasant surprises.

Need help assessing your remote‑work plans? We specialise in global compliance, from entity strategy to payroll and tax registration. 

Contact us to discuss your next cross‑border hire.

FAQs

Does remote work always create permanent establishment risk? 

Not necessarily. PE arises from a combination of factors: authority to conclude contracts, revenue‑generating activities, a fixed place of business and duration. Short‑term or preparatory activities may fall outside the definition, but companies should still assess each case.

How does an Employer of Record help? 

An EOR hires the worker under its local entity, managing payroll and compliance. Because the EOR is the legal employer, the client company can avoid creating a legal presence in the worker’s country. This reduces PE risk and simplifies payroll and tax obligations.

Can I just set up a subsidiary to avoid PE issues? 

Establishing a local subsidiary can indeed prevent certain PE risks, but it involves significant costs and administrative burdens. You will need to register with local authorities, hire directors, file annual reports and maintain separate accounts. For many companies, using an EOR or carefully structuring the remote role is a more efficient solution.

What about the 183‑day rule? 

Many double‑tax treaties provide that a fixed place of business is only deemed a PE if activities continue for longer than 183 days in a twelve‑month period. However, some countries use shorter or longer thresholds. In addition, workers can create a PE even before 183 days if they perform certain core activities. Tracking days is important but not the only factor.