A permanent establishment (PE) is a fixed place of business through which a foreign enterprise wholly or partly carries on its business, creating a taxable presence in the source country under Article 5 of a DTAA. If a foreign company has a PE in India, the business profits attributable to it are taxable in India.
Why PE matters
Under a DTAA, business profits of a foreign enterprise are taxable in India only if it has a PE here. PE is therefore the threshold that decides taxability of cross-border business income. Domestically, the parallel concept is business connection under Section 9(1)(i), now expanded by Significant Economic Presence (SEP) for the digital economy.
Types of PE
| Type | When it arises |
|---|---|
| Fixed-place PE | A fixed place (office, branch, factory) at the enterprise's disposal |
| Construction PE | A building site or project exceeding the treaty time threshold (e.g. 6-12 months) |
| Service PE | Services rendered through personnel present beyond a threshold period |
| Agency PE | A dependent agent habitually concluding contracts for the enterprise |
Preparatory and auxiliary exclusion
Activities that are merely preparatory or auxiliary — storage, display, purchasing, information gathering — generally do not create a PE. The BEPS changes (and the MLI) narrowed this exclusion and introduced an anti-fragmentation rule, so splitting activities to stay under thresholds is scrutinised.
Attribution and practical points
- If a PE exists, only the profits attributable to it are taxed in India.
- Secondment arrangements can create a service PE — see secondment.
- Coordinate the PE position with transfer pricing on dealings with the head office.
- The MLI's principal purpose test can deny treaty benefits in abusive structures.
Key takeaways
- PE is the threshold for taxing a foreign enterprise's business profits.
- Types: fixed-place, construction, service and agency PE.
- Preparatory/auxiliary activities generally do not create a PE.
- Only profits attributable to the PE are taxed in India.