business resources
How Companies Accidentally Trigger a Foreign Tax Bill
24 Aug 2026
A US software firm lets one of its engineers move home to Berlin. Same role, same team, same payroll run out of Delaware. Eighteen months later a letter turns up from the German tax office: the company needs to register locally and pay corporate tax on the profit tied to that engineer's work. Nobody opened an office. Nobody decided to start employing people in Germany. One person worked from their kitchen table, and that was enough. This is permanent establishment, the tax exposure almost nobody signs up for on purpose, and it is quietly becoming one of the bigger risks in remote hiring.
It was built for factories, not laptops
Permanent establishment, or PE, is the point at which a company's activity in a country becomes substantial enough that the country gets to tax it. The OECD's Model Tax Convention, which most of the world's tax treaties borrow from, calls it a fixed place of business through which a company operates. The rule was written with branch offices and factories in mind. It now has to cope with a developer on a laptop in a country their employer has never set foot in, and that is where companies get caught.
The triggers look like ordinary hiring
What makes PE dangerous is that the things that set it off do not feel like foreign expansion at all. They feel like routine decisions a manager makes without a second thought:
- A home office used regularly, over months, can itself count as a fixed place of business for the employer.
- Someone who habitually negotiates or signs deals abroad can create a PE on their own, what tax people call a dependent agent.
- A senior person spending a large share of their working time in one country, with a real commercial reason to be there, can be enough.
- Even storing stock or equipment somewhere can qualify, depending on what it is used for.
Underneath most of these sits the same quiet fact: if you pay someone to work in a country where you have no legal presence, you are an unregistered employer there. That is the root of it, and it is why plenty of companies hire through a locally registered employer of record instead. The EOR is the legal employer on the ground, running payroll and tax in-country, so the business is not sitting in a market unregistered. It does not wipe out every risk. A person signing big contracts can still raise the dependent-agent question, so who does what still matters. But for a normal remote hire doing normal work, it closes the gap that causes most of the trouble. The catch is that coverage varies, so it pays to check which providers cover the countries you hire in before assuming they all do.
The rules just got sharper
For years this was a grey area, governed by two vague paragraphs written before remote work was a thing. In November 2025 the OECD rewrote them, its first real update to the model treaty since 2017. The new guidance runs to five pages and gives tax authorities a rough dividing line: under half an employee's working time in a country, a home office generally is not a permanent establishment; past that, they look hard and ask whether there is a genuine business reason for the person to be based there. The stated aim is to calm the uncertainty. The quieter message is that the arrangements remote-first companies lean on are now firmly on the radar.
And the bill arrives late
A permanent establishment is not a fee you pay once. It can mean registering for corporate tax in the country, filing returns you never budgeted for, and settling back taxes and interest on the years it went unnoticed, with penalties on top. Cleaning it up afterward, in advisers and management time, usually costs far more than prevention would have. It also turns on what happened day to day, not on what the paperwork says, so a clause insisting someone is not a permanent establishment counts for very little when the facts point the other way. That is the awkward part: everything looks fine for a year or two, then a letter lands about a tax year you had stopped thinking about, and by then the cheap fixes are gone. Knowing where your people work, and how they are employed, is a lot easier to sort out before a tax authority takes the question off your hands.
