Permanent Establishment Risk for Foreign Companies in India

A permanent establishment brings a foreign company’s India-attributable business profits into Indian tax. It can arise through a fixed place of business, a dependent agent concluding or habitually playing the principal role in concluding contracts, personnel providing services beyond a threshold period, or a construction site exceeding a duration threshold. Most PE exposure is created inadvertently by operating practice, not by structure.

Why this is a live risk

PE exposure rarely arises from a deliberate decision. It arises from ordinary commercial behaviour: a sales employee who begins negotiating rather than introducing, a subsidiary whose staff effectively conclude the parent’s contracts, secondees who remain functionally employed by the foreign entity, or engineers on site for longer than planned.

The consequences are disproportionate to the cause. A PE finding brings attributable profits into charge, typically with retrospective effect across multiple years, plus interest and penalty — and it generally brings a transfer pricing dispute about attribution alongside it.

The categories

Fixed place PE. A fixed place of business through which business is wholly or partly carried on. Preparatory and auxiliary activities are excluded, but the exclusion is narrower than commonly assumed and is tested on what actually happens at the location, not what the office is called. The premises need not be owned or leased — space consistently at the enterprise’s disposal can suffice.

Agency PE. A dependent agent who concludes contracts, or habitually plays the principal role leading to their conclusion without material modification by the principal. The modern formulation is deliberately broader than formal signing authority: an agent who negotiates all material terms while the principal rubber-stamps can create a PE. An independent agent acting in the ordinary course of its own business is excluded, but exclusivity undermines independence.

Service PE. Present in many Indian treaties. Arises where an enterprise furnishes services in India through personnel present beyond a threshold period, typically expressed in days within a twelve-month window, though thresholds vary by treaty.

Service PE is the category most often triggered inadvertently, because day counts accumulate across multiple short visits by different individuals and nobody tracks the aggregate.

Construction PE. A building site or installation project exceeding a duration threshold. Splitting a contract across entities to stay below the threshold is a recognised avoidance pattern, generally addressed by anti-fragmentation rules.

Secondment — the recurring dispute

Secondment of employees from a foreign parent to an Indian entity generates a disproportionate share of PE and withholding disputes. The question is whether the seconded individual is functionally an employee of the Indian entity or remains an employee of the foreign entity providing services to it.

The factors examined are practical rather than contractual: who directs and controls the work, who bears the risk of performance, who can terminate the assignment, whose business the role serves, and how the cost is characterised in the recharge. Documentation stating the Indian entity is the employer will not survive facts pointing the other way.

[INSERT: an anonymised Solique example of a secondment arrangement restructured to manage PE and withholding exposure.]

Managing the exposure

Track days for every individual travelling to India on business, in aggregate across the group, against the relevant treaty threshold. This is a simple control and it is frequently absent.

Define and enforce the limits of what India-based personnel may do — introducing versus negotiating, quoting versus committing — then check what they actually do.

Review secondment arrangements against the substance factors, not the contract.

Where a PE genuinely exists, recognising it and managing attribution is usually better than contesting existence and losing both arguments.

Related reading

• transfer pricing documentation — Transfer Pricing Documentation for Indian Subsidiaries
• entity and route selection — Structuring Inbound Investment into India: Entity Selection
• withholding on non-residents — TDS on Payments to Non-Residents Under Section 393(2)