Detailed Explanation
How it works
Under Article 5 of a DTAA, if a foreign enterprise has a PE in India, the business profits attributable to it are taxable in India. Types include fixed-place, construction, service and agency PE.
The three PE routes that matter in practice
Fixed-place PE (an office, branch, factory — a place at the enterprise's disposal through which business is carried on), agency PE (a dependent agent habitually concluding contracts or playing the principal role leading to their conclusion, post-MLI), and service PE (employees furnishing services in India beyond the treaty's day threshold — commonly 90 or 183 days). Construction sites have their own clause and duration test.
Worked example
A Singapore company sends engineers to an Indian customer site for 8 months on an implementation project. If the India-Singapore service-PE threshold is crossed, the project profits attributable to the Indian activity become taxable in India — requiring an Indian tax presence: PAN, return filing, books for attribution, and the customer's withholding position changes from "no PE — business profits not taxable" to full Section 195 withholding. The no-PE declaration given at the start of the year does not survive the facts changing mid-year.
Modern pressure points
Employees working remotely from India for foreign employers (home-office PE arguments), secondment structures after the Northern Operating Systems ruling (service-versus-employment characterisation), digital businesses (addressed partly by India's Significant Economic Presence rules where no treaty protects), and liaison offices drifting beyond preparatory-auxiliary activity. PE analysis is fact-annual: re-run it every year, and paper the conclusion.
Frequently asked questions
What is a permanent establishment?
A fixed place of business that creates a taxable presence for a foreign enterprise in another country.
What does a PE mean for tax?
The business profits attributable to the PE become taxable in the source country.
This content is for general guidance only and does not constitute professional advice. Tax law changes frequently — verify the current position and consult a qualified Chartered Accountant before acting. Last reviewed: June 2026.