—Guide
Permanent Establishment in India: What Creates a PE for Foreign Companies
What creates a permanent establishment for a foreign company in India — fixed places, agents, services and projects — and how profits are then taxed.
A foreign company is taxed in India on its business profits only if it has a taxable presence here — a 'permanent establishment' under a tax treaty, or a 'business connection' under Indian law. Knowing what creates one helps foreign companies plan their Indian activities. This guide explains the main types.
Fixed Place PE
A fixed place of business in India, at the foreign company's disposal, through which its business is wholly or partly carried on — such as an office, branch, factory or workshop. Activities that are only preparatory or auxiliary, like storage, display or collecting information, generally don't create a PE on their own.
Dependent Agent PE
A person in India who habitually concludes contracts on behalf of the foreign company, or habitually plays the principal role leading to contracts that are routinely concluded without material modification. Independent agents acting in the ordinary course of their business generally don't create a PE.
Service PE
Under some treaties, a PE arises where the foreign company provides services in India through employees or other personnel for more than a specified period. The thresholds and wording vary by treaty.
Construction and Installation PE
A building site, construction, installation or assembly project in India lasting longer than the treaty's specified period.
Significant Economic Presence
Under Indian law, a business connection can also arise from significant economic presence — transactions or systematic user interaction in India above prescribed thresholds. Where a treaty applies and is more beneficial, its PE rules generally govern.
If a PE Exists
- Profits attributable to the PE are taxable in India.
- The foreign company must file returns in India.
- Payers may need to withhold tax on payments to it.
Subsidiaries Aren't Automatically PEs
An Indian subsidiary is a separate entity and isn't automatically a PE of its parent. But it can become one if, for example, it habitually concludes contracts for the parent, or the parent's staff use its premises for the parent's own business.
Getting Help
Think Filing reviews foreign companies' Indian activities for PE risk and recommends practical ways to manage it.