Written by the Delhi Legal Company India Entry & FDI Advisory team · Last updated August 2026 · Reviewed quarterly against CBDT notifications, Income Tax Department guidance and treaty developments
Introduction
Nobody signs a document creating a permanent establishment.
It happens because two engineers stayed eleven months instead of three. Because a liaison office started quoting prices. Because a distributor’s contracts were signed abroad but negotiated entirely in Gurugram. Because a country manager, hired to “support the region,” began closing deals.
By the time it surfaces — usually in an assessment three or four years later — the foreign parent is being assessed on profits attributable to Indian operations it never formally established, for years it cannot now change, with interest running.
The exposure is not the Indian subsidiary’s. It is the parent’s. And it is the one Indian tax risk that no amount of care with the subsidiary’s own compliance protects against, because it arises from conduct rather than from structure.
Two things make 2026 the year to look at this properly. The Income-tax Act, 2025 has recodified the entire framework, moving business connection and permanent establishment to new sections and putting significant economic presence on a fresh statutory footing. And the window between commencement and the first wave of assessments under the new regime is exactly when evidence should be gathered — not after a notice arrives.
This guide covers how a PE arises, the five fact patterns that create it for foreign-owned groups, what happens once you have one, and the controls that actually prevent it.
About this guide
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. Permanent establishment is the issue that most often arrives without warning, because it is created by operational decisions taken by people who do not know they are taking a tax decision.
Where a rule is settled we state it and cite the source. Where the outcome depends on facts — and PE almost always does — we set out the test and the evidence that supports each side of it, rather than offering a general answer that would not survive contact with your actual arrangement.
Where the legislative position is in transition, as much of it is in 2026, we say which framework a reference belongs to.
Primary sources: the Income Tax Department for the Income-tax Act, 2025, the Income Tax Rules, 2026 and CBDT guidance, and the OECD Model Tax Convention and its commentary for treaty interpretation.
1. What changed under the Income-tax Act, 2025
The Income-tax Act, 2025 came into effect from 1 April 2026, representing India’s most comprehensive tax reform in decades, with the international taxation chapter completely restructured to address digital economy challenges and base erosion concerns.
| Concept | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Business connection and permanent establishment | Section 9(1)(i) and its Explanations | Section 9(9)(a) and Section 177(3)(c) |
| Significant Economic Presence | Explanation 2A of Section 9(1)(i), inserted by Finance Act 2018 | Section 9(8)(d) |
| SEP thresholds | Rule 11UD | Rule 13 of the Income Tax Rules, 2026 |
| Period terminology | Previous Year / Assessment Year | Tax Year — the twelve-month period commencing 1 April |
The Income-tax Act 2025, together with the Income-tax Rules 2026 that took effect on 1 April 2026, has overhauled procedural terminology, tightened documentation requirements and updated the statutory framework within which Assessing Officers evaluate whether a non-resident has created a taxable presence.
The substantive tests have not been rewritten. A fixed place is still a fixed place; a dependent agent is still a dependent agent. What has changed is the citation, the procedural architecture and the evidentiary expectation.
For in-house tax directors and CFOs, the window between legislative commencement and the first wave of assessments under the new regime is the critical period for triage, evidence gathering and pre-audit positioning. That window is open now and closing.
2. Two systems, and how they interact
This is the structural point that most summaries skip, and it decides a large proportion of real cases.
2.1 Domestic law: business connection
Indian domestic law taxes a non-resident on income accruing or arising in India, including through a business connection. A business connection may refer to any relationship through which a non-resident earns income from India, and income arising directly or indirectly through such connection is taxable in India to the extent attributable to operations carried out in India.
The scope of business connection under the Income-tax Act is similar to the provisions relating to Dependent Agent Permanent Establishment in India’s tax treaties.
2.2 Treaty law: permanent establishment
Where a double taxation avoidance agreement applies, business profits of a foreign enterprise are taxable in India only if the enterprise has a permanent establishment here, and only to the extent attributable to it. The test is governed by Article 5 of the applicable DTAA and, in the absence of a treaty, by the business connection provisions of the Income-tax Act.
2.3 Which prevails
Where a treaty applies, the taxpayer may take whichever position is more beneficial. Because the treaty PE threshold is generally narrower than the domestic business connection test, a foreign enterprise from a treaty country will normally be assessed against the treaty definition.
Three consequences follow, and each is commercially significant.
Your treaty matters more than the domestic rule. A US, UK, Singapore or Netherlands parent is assessed against that treaty’s Article 5, with its specific thresholds. Two group companies in different jurisdictions doing identical things in India can have different outcomes.
Non-treaty parents are far more exposed. With no treaty, the domestic business connection test applies directly — and it is wider. Groups that route India-facing activity through a jurisdiction without an Indian treaty carry materially more risk than they usually realise.
SEP is domestic-only. Significant economic presence is a domestic law nexus rule. Where a treaty applies and its PE article has not been correspondingly amended, the treaty position generally prevails. This is why SEP bites hardest on non-treaty jurisdictions — a point section 7 returns to.
3. Fixed place permanent establishment
A PE is a fixed place of business through which a foreign enterprise carries on business. Three elements, each of which has to be present.
| Element | What it means | Where it is tested |
|---|---|---|
| Place of business | Premises, facilities or installations used for the business | Does not need to be owned or leased; a room, a desk, or space in a subsidiary’s office can qualify |
| Fixed | A degree of permanence in a specific geographic location | Duration and consistency of use, not formality of arrangement |
| Business carried on through it | The enterprise’s own business, not merely presence | What is actually done there, by whom, and for whose benefit |
3.1 The “at disposal” test
A fixed place PE can be created inadvertently by having an office or space at disposal in India, even if not formally registered as a branch.
This is the element groups most consistently underestimate. You do not need a lease. You need space that is, in practice, available to the foreign enterprise for its own business. A permanently allocated desk in the subsidiary’s office, used by visiting parent personnel to conduct the parent’s business, can satisfy the test.
The practical questions an officer asks: was the same space used repeatedly, was it available whenever the parent’s people came, could the subsidiary have refused them access, and was the work done there the parent’s business or the subsidiary’s?
3.2 Preparatory and auxiliary activities
Most treaties exclude activities that are preparatory or auxiliary in character — storage, display, purchasing, collecting information, and similar activities carried on for the enterprise.
Two limitations matter. The exclusion applies to the character of the activity, not to how the group labels it. And it evaluates the activity against the enterprise’s business as a whole — an activity that is core to the enterprise cannot be auxiliary merely because it is small.
The classic failure: an office established to “collect market information” that progressively begins to identify customers, discuss requirements and shape offers. Each step is defensible in isolation. The aggregate is a sales function.
4. Agency permanent establishment
An agency PE arises where a person acting on behalf of the foreign enterprise has, and habitually exercises, authority to conclude contracts in its name.
A non-resident is considered to have a business connection in India if a person in India habitually concludes contracts, or plays the key role in concluding them, on behalf of the non-resident.
4.1 The phrase that changed everything
Read that again: or plays the key role in concluding them.
This closed the structure that groups relied on for years — negotiating everything in India while routing signature offshore. Where the Indian person does the substantive work leading to the contract, and the overseas signature is a formality, the test is met regardless of where the pen touched paper.
The questions that follow: who identified the customer, who discussed requirements, who negotiated price, who agreed terms, and what did the overseas signatory actually add to the process? If the honest answer is that head office signed what India had already agreed, the location of signature is not a defence.
4.2 The other two limbs
An agency PE can also arise where a person regularly maintains a stock of goods from which deliveries are made, or habitually secures orders wholly or almost wholly for the foreign enterprise.
The stock limb catches arrangements where an Indian party warehouses the foreign enterprise’s goods and fulfils orders from them. The order-securing limb catches sales agents who do not conclude contracts but whose orders are routinely accepted.
4.3 Dependent versus independent
The agent must be dependent, acting under the foreign company’s control. An independent agent, such as a broker acting for multiple clients, generally does not create a PE, unless they act exclusively or almost exclusively for one foreign company.
That final clause is where distributor arrangements fail. A distributor genuinely serving multiple principals, bearing its own risk and setting its own prices, is independent. A distributor whose entire business is one foreign principal, operating on that principal’s instructions, is not — whatever the agreement calls it.
| Indicator of independence | Indicator of dependence |
|---|---|
| Multiple unrelated principals | One principal, or one accounting for almost all revenue |
| Bears inventory, credit and market risk | Guaranteed margin or reimbursed for losses |
| Sets its own prices within commercial limits | Prices dictated by the principal |
| Determines its own working methods | Detailed operational instruction and reporting |
| Free to accept or decline business | Obliged to promote the principal’s products |
| Own sales infrastructure | Uses the principal’s systems, email domain, business cards |
The last row is small and revealing. Indian personnel using the foreign parent’s email domain and describing themselves as its representatives is evidence an officer will use, and it costs nothing to avoid.
5. Service permanent establishment
A service PE arises when a foreign enterprise furnishes services in India through its employees or other personnel for a specified period, commonly exceeding 90 or 183 days within any 12-month period, depending on the DTAA.
This is the type most likely to catch a group that has done everything else correctly, because it turns on nothing more than counting days.
5.1 What the threshold actually counts
Read your specific treaty. The thresholds vary, and so does the counting mechanism.
| Variable | Why it matters |
|---|---|
| Number of days | Commonly 90 or 183, but treaty-specific |
| Measurement window | Usually any twelve-month period, which may straddle two financial years |
| Whether days are aggregated across personnel | Some treaties count enterprise-days rather than individual-days, so three people for one month each may count as three months |
| Whether the project must be the same or connected | Some treaties aggregate only for the same or connected projects |
| Whether related enterprises are counted together | Some treaties aggregate services by associated enterprises |
The aggregation point is where groups are surprised. A team of four visiting for six weeks each, on the same project, can breach a 90-day threshold in a single quarter under a treaty that counts enterprise-days — while every individual believes they were nowhere near the limit.
5.2 Track days from day one
The control is administrative, not legal: a central register of every day any parent or group employee spends in India, by person, by project, by purpose.
Nobody wants to maintain it. Every group that has faced a service PE assessment wishes they had. Reconstructing travel from expense claims and passport stamps three years later is possible, expensive, and usually incomplete in exactly the places that matter.
6. Construction and project permanent establishment
A building site, construction, installation or assembly project, or supervisory activities in connection with it, creates a PE where it lasts for a specified period, typically more than six or twelve months as per the applicable DTAA.
Three points recur in practice.
The clock includes preparatory work on site and continues through interruptions such as seasonal delays or waiting for materials. It stops when the work is complete or permanently abandoned, not when the contractor’s team happens to be elsewhere.
Splitting contracts rarely works. Dividing a single project among group companies, each staying below the threshold, is a well-known planning structure and a well-known audit target. Many treaties and anti-abuse rules aggregate connected activities.
Supervisory activity counts. A group that supplies equipment from overseas and sends supervisory personnel for installation is within scope even though it is not itself constructing anything.
7. Significant Economic Presence
Significant Economic Presence under Section 9(8)(d) of the Income Tax Act, 2025 is a nexus rule that deems a non-resident to have a business connection in India if the non-resident exceeds prescribed thresholds of either transaction value or user engagement in India — regardless of whether the non-resident has any physical presence, office or agent in India.
7.1 The thresholds
Rule 13 of the Income Tax Rules, 2026 carries forward the ₹2 crore transaction threshold and the 3 lakh user threshold, replacing Rule 11UD.
SEP is established where annual revenue from Indian customers exceeds ₹2 crore, or where there is systematic and continuous solicitation of business activities with over 3 lakh Indian users.
Either limb is sufficient. A business well below the revenue threshold but with a large free user base can be caught by the user limb alone — which is precisely the design intent for platform and freemium models.
7.2 What SEP was for
SEP was introduced to address the challenge of taxing digital economy profits. Traditional rules required a permanent establishment before a country could tax a non-resident, and with technology enabling non-residents to derive significant revenue from India through digital platforms, e-commerce, SaaS, streaming, gaming and data services without any physical presence, SEP provides India with the legal basis to tax that income.
7.3 The export purchase carve-out
The Finance Act, 2025 clarified that transactions or activities of a non-resident in India confined to the purchase of goods in India for the purpose of export do not constitute significant economic presence.
This is a meaningful relief for sourcing operations. A foreign buyer procuring from Indian suppliers for export is not brought into the SEP net by that activity alone.
7.4 Why the treaty usually decides it
SEP is a domestic law provision. Where a treaty applies and its permanent establishment article has not been correspondingly amended, the treaty position generally prevails — and a treaty PE requires a physical or agency nexus that SEP by definition does not.
The practical consequence: SEP bites hardest on non-treaty jurisdictions, or where treaty benefits are unavailable for another reason such as failure to satisfy the limitation on benefits article or the absence of a valid tax residency certificate.
If your group sells into India digitally from a jurisdiction without a favourable treaty, assess this before revenue scales, not after.
7.5 It is on the return form
Income tax return forms applicable to companies, including foreign companies, have been updated to explicitly include disclosure of significant economic presence status.
SEP is therefore not an interpretive question left to an assessment. It is a disclosure the return asks for directly, which means the position has to be reached and documented before filing rather than defended afterwards.
8. The five fact patterns that create PE for foreign-owned groups
In practice, exposure clusters. These five account for the overwhelming majority of what we see.
8.1 Liaison office drift
A liaison office is permitted to represent the parent, promote exports and imports, promote technical or financial collaboration, and act as a communication channel. It cannot earn income in India.
The drift is gradual and each step is individually defensible. Introducing the parent to potential customers becomes discussing their requirements, which becomes quoting indicative pricing, which becomes agreeing terms subject to head office confirmation.
At some point on that path the office stopped liaising and started selling. It now creates two problems simultaneously: a FEMA contravention for operating outside permitted scope, and a permanent establishment of the parent with tax on attributable profits.
The control is a written scope of activity, communicated to the office’s staff, with a standing instruction that anything resembling negotiation or pricing goes to head office. Our liaison office and branch office pages set out the permitted activities for each. Where the office has already moved past that line, the answer is to convert rather than to hope — see our guide to business structures in India for foreign companies.
8.2 Secondment
Covered in full in section 9. It is the single most litigated PE fact pattern in India.
8.3 The distributor who is not independent
A distribution agreement is signed. Commercially, the Indian distributor sells only this principal’s products, takes instruction on pricing, is reimbursed for marketing, and its personnel present themselves as the principal’s India team.
The agreement says “independent contractor.” The conduct says dependent agent. The conduct wins.
8.4 The country manager
A group hires one senior person in India, often through an employer of record, to “develop the market.” The role has no formal contracting authority. Within a year that person is running the India relationship end to end — identifying opportunities, negotiating, and effectively deciding what the group will accept.
Contracts are signed abroad. Under the “plays the key role” limb, that does not resolve it.
Employer of record arrangements do not change this analysis. What the person does determines the outcome, not who issues the payslip.
8.5 Infrastructure and remote delivery
Pure remote delivery from offshore, with no Indian personnel, agents or dedicated infrastructure, generally does not create a fixed place or service PE. However, risk arises if local employees, dependent agents, onsite service personnel, or self-managed servers are present.
The server point is worth isolating. Equipment at the enterprise’s disposal in India, performing more than preparatory or auxiliary functions and operated by or for the enterprise, can constitute a fixed place. Third-party cloud hosting is generally distinguishable; a self-managed installation in a data centre is a different question.
9. Secondment: the highest-risk arrangement in India
The secondment of employees from a foreign parent company to an Indian entity, whether a subsidiary or a third party, is a frequent point of contention regarding service PE.
The commercial arrangement seems innocuous. The parent has expertise the Indian entity needs. Two people relocate for a year. The Indian entity reimburses the salary cost. Nobody thinks of it as a service.
9.1 The test
If the seconded employees continue to be under the employment and control of the foreign enterprise, and their services in India exceed the duration specified in the DTAA, it can lead to a service PE. The key is to determine who is the economic employer and whether the foreign entity is actually rendering services in India through these personnel.
The label on the arrangement is not decisive. The question is whether, in substance, the parent is supplying services to India using its own personnel, or whether those individuals have genuinely become employees of the Indian entity for the period.
| Points toward genuine employment by the Indian entity | Points toward the parent rendering services |
|---|---|
| The Indian entity directs and controls day-to-day work | The individual continues to report to a parent-company manager |
| The Indian entity bears the cost and cannot recover it | The parent invoices the Indian entity with a mark-up |
| The Indian entity bears the risk and responsibility for the work | The parent retains responsibility for output quality |
| The Indian entity can terminate or replace the individual | The parent decides who is deployed and for how long |
| The individual is integrated into the Indian organisation | The individual remains within the parent’s structure and appraisal system |
| An employment contract with the Indian entity exists | The individual’s employment with the parent continues unchanged |
| Payroll and statutory obligations run through India | Home-country payroll continues, with a recharge |
9.2 Where the mark-up matters
A pure reimbursement of actual salary cost, without mark-up, is more consistent with the Indian entity being the employer. A recharge with a mark-up looks like a service fee, because that is what a mark-up is for.
This is also why the transfer pricing and PE analyses cannot be run separately. A group that adds a mark-up to satisfy transfer pricing has, in doing so, strengthened the argument that the parent is rendering a service. A group that removes the mark-up to defend the PE position may create a transfer pricing question. The two positions have to be designed together.
9.3 What to do before the secondment starts
- Decide the intended characterisation and document it in a secondment agreement executed before deployment
- Align reporting lines, appraisal and termination rights with that characterisation
- Decide the recharge basis deliberately, with the transfer pricing and PE consequences considered together
- Run Indian payroll where the intended position is Indian employment — see payroll processing and the associated labour law compliance
- Track days in India from the first arrival
- Review the social security position and any applicable totalisation agreement
All of this is straightforward before the secondment. None of it is available afterwards.
10. How much your treaty actually changes
Two group companies doing identical things in India can reach opposite conclusions, because the treaty they sit under is different. This is not a technicality — for a group with entities in several jurisdictions, it is a structuring decision.
10.1 What varies between treaties
| Feature | What to check in your treaty |
|---|---|
| Service PE threshold | Whether the treaty has a service PE article at all, and if so the day threshold and counting window |
| Enterprise-day aggregation | Whether days are counted per person or per enterprise, and whether associated enterprises are aggregated |
| Construction PE threshold | Commonly six or twelve months; supervisory activity may be inside or outside the article |
| Agency PE wording | Whether the article covers only contract conclusion or extends to the principal role leading to conclusion |
| Preparatory and auxiliary exclusions | Whether the list is closed, and whether an anti-fragmentation rule applies |
| Limitation on benefits | Whether treaty access itself is conditional, which can remove the protection entirely |
| Fees for technical services article | Whether a make-available condition applies, which affects characterisation of service income |
The limitation on benefits point deserves emphasis. A treaty position is only available if the entity actually qualifies for treaty benefits, which requires a valid tax residency certificate and, under several treaties, satisfaction of substance or purpose tests. A holding company with no real activity in its home jurisdiction may find that the treaty it was relying on is unavailable at exactly the moment it is needed.
10.2 The practical consequence for group structuring
Where a group has a choice about which entity contracts with Indian customers or deploys personnel to India, the treaty position is part of that choice. Routing India-facing activity through a jurisdiction without an Indian treaty, or with a weak one, imports the domestic business connection test in full — and the domestic test is wider.
This interacts with structure selection more broadly; see our guide to business structures in India for foreign companies.
11. Four scenarios, worked through
The tests above are abstract. These are the shapes they take in practice.
Scenario A — The liaison office that started selling
A German manufacturer opens a liaison office in Mumbai with three staff to build relationships with Indian distributors. Two years later those staff are producing quotations, negotiating volumes and agreeing delivery schedules. Contracts are executed in Germany.
Analysis. The office is a fixed place at the enterprise’s disposal. The activity is no longer preparatory or auxiliary — it is the core sales function. Separately, the staff play the key role in concluding contracts, so an agency PE arises independently. The German signature does not assist.
Exposure. Tax on profits attributable to Indian sales, for both years, plus interest. A FEMA question on operating outside the permitted scope. Return filing obligations for the parent that were never met.
What would have prevented it. An annual review comparing what the office actually did against its permitted scope, and conversion to a subsidiary at the point the answer changed.
Scenario B — The secondment that ran long
A Japanese parent seconds three engineers to its Indian subsidiary to support a product launch. Planned for four months; extended to fourteen. They remain on Japanese payroll, report to a Tokyo manager, and the parent invoices the subsidiary for salary cost plus 8%.
Analysis. The mark-up and the retained reporting lines both point to the parent rendering a service through its own personnel. Under a treaty counting enterprise-days, three people over fourteen months comfortably exceeds any service PE threshold. The economic employer is arguably the parent throughout.
Exposure. Service PE for the period, with attribution of profit to the Indian activity. A transfer pricing question on the recharge. Potential payroll and social security exposure.
What would have prevented it. A secondment agreement executed before deployment with a decided characterisation, Indian payroll, reporting lines into the Indian entity, a cost-only recharge, and a day register that would have flagged the threshold in month six.
Scenario C — The country manager on an EOR
A US SaaS company hires one senior salesperson in Bengaluru through an employer of record. No Indian entity. Within eighteen months she has closed contracts worth several million dollars with Indian enterprises, running the entire cycle from prospecting to commercial agreement. Signature happens in California.
Analysis. The EOR is irrelevant to the test. She plays the key role in concluding contracts and acts exclusively for one enterprise. Agency PE. The India-US treaty article governs, and the analysis turns on her authority in substance.
Exposure. Tax on profits attributable to Indian sales for the period, with attribution contested. Parent return filing obligations. Withholding positions on any related payments revisited.
What would have prevented it. Either accepting the exposure and structuring for it — incorporating and pricing the Indian entity properly — or genuinely confining the role to lead generation with commercial negotiation demonstrably conducted from the US.
Scenario D — The digital business with no presence at all
A gaming company incorporated in a jurisdiction with no Indian tax treaty earns ₹9 crore a year from Indian users and has around 1.4 million Indian accounts. No office, no employees, no agent, no servers in India.
Analysis. No fixed place, no agent, no service PE. But both SEP limbs are crossed, and there is no treaty to displace the domestic rule. Business connection established under Section 9(8)(d).
Exposure. Tax on income attributable to Indian operations, plus a disclosure obligation on the return form that was not met.
What would have prevented it. Nothing about the operating model — but the position should have been assessed and provided for before revenue scaled, and the group’s choice of contracting jurisdiction was the decision that mattered.
12. What happens if you have a permanent establishment
The consequence is not a penalty. It is a tax return, a rate, and an argument about how much profit belongs to India.
12.1 Filing and assessment
The foreign enterprise becomes taxable in India on profits attributable to the PE. It must obtain a PAN, file an Indian income tax return, and is subject to assessment. It is not the Indian subsidiary’s return — it is the parent’s own Indian filing obligation, separate from the subsidiary’s income tax filing.
12.2 The rate
Profits attributable to a PE are taxed at foreign company rates. The base rate for foreign companies is 35%, reduced from 40% by the Finance Act, 2024, with surcharge and cess taking the effective rate to roughly 36% to 38%.
That is materially higher than the approximately 25.17% effective rate available to a qualifying domestic company on the concessional regime — which is one reason an unplanned PE is expensive even where the profit attributed to it is modest.
12.3 Attribution
How much profit belongs to the PE is the substantive fight, and it is a transfer pricing exercise. The PE is treated as a distinct enterprise, and profits are attributed by reference to the functions performed, assets used and risks assumed by it.
Head office to PE dealings are international transactions, so the foreign company undergoes a transfer pricing audit and files the accountant’s report alongside its return. Our guide to transfer pricing for Indian subsidiaries of foreign companies covers the framework.
12.4 The consequences that follow
| Consequence | Effect |
|---|---|
| Tax on attributable profits | At foreign company rates, for every year the PE existed |
| Interest | From the date the tax was due, compounding the exposure across historical years |
| Penalty exposure | For failure to file returns and, where applicable, for misreporting |
| Transfer pricing obligation | Accountant’s report and documentation on head office dealings |
| Withholding recharacterisation | Payments treated as remittances may be recharacterised, changing the rate applied |
| Group disclosure | An unrecognised tax position that may need reflecting in group accounts |
The historical dimension is what makes this different from other Indian tax risks. A PE discovered in year four is a PE that existed in years one, two and three, and each of those years is assessed with interest.
13. Where PE meets your other obligations
A permanent establishment finding does not sit in isolation. It changes the analysis of transactions you have already reported.
| Area | How a PE changes it |
|---|---|
| Withholding on payments to the parent | Where income is attributable to a PE, the treaty article and rate applied may change; positions taken on earlier remittances may be revisited |
| Transfer pricing | Head office to PE dealings become reportable international transactions |
| Treaty relief | Business profits attributable to a PE are taxable in India notwithstanding the general treaty allocation |
| GST | The place of supply and registration analysis may change where an Indian fixed establishment exists |
| FEMA | Conducting business through an unregistered place of business raises a separate regulatory question |
| Group tax reporting | Home-country treatment of Indian tax paid, and foreign tax credit availability |
The withholding interaction is the one that surprises finance teams. Payments made to the parent over several years, correctly withheld at treaty rates on the basis that no PE existed, sit differently once a PE is found. Our guide to TDS on payments to your foreign parent covers the withholding framework.
14. Managing the risk: controls that actually work
PE risk is created by operational decisions. It is therefore managed by operational controls, not by legal opinions.
14.1 The day-count register
One register, maintained centrally, recording every day any parent or group employee spends in India: who, when, how long, which project, what purpose.
Review it quarterly against the applicable treaty threshold. This single control prevents more service PE exposure than every contractual protection combined, and it costs an hour a quarter.
14.2 Contracting authority, written down
Define who may negotiate and who may commit the group, and make the boundary explicit to India-based personnel. Where customer contracts are involved, drafting and vetting of agreements should reflect the intended authority position rather than contradict it. Where the intended position is that India does not conclude contracts, the process must show substantive negotiation happening elsewhere — not merely signature happening elsewhere.
14.3 Scope discipline for liaison offices
A written scope of permitted activity, given to the office’s staff, with a standing instruction routing anything resembling pricing or negotiation to head office. Review annually against what the office is actually doing, not against what it was set up to do.
14.4 Secondment governance
No secondment begins without a written agreement, a decided characterisation, aligned reporting lines and a deliberate recharge basis. Where the intended position is Indian employment, run Indian payroll.
14.5 Email domains, cards and titles
Small, and disproportionately useful in evidence. Where the intended position is that Indian personnel work for the Indian entity, they should use its domain, its cards and its titles. Where they present themselves as the foreign parent’s India office, an officer will reasonably conclude that is what they are.
14.6 An annual PE review
Once a year, in the same cycle as the transfer pricing scoping call: what did group personnel do in India this year, what did India-based personnel do for the group, what changed, and does the position we documented last year still describe reality?
Many groups run this alongside their other India compliance through virtual CFO services rather than treating it as an episodic legal question.
15. The evidence file
A PE position is defended with evidence, and evidence is contemporaneous or it is weak.
| Position taken | Evidence that supports it |
|---|---|
| No fixed place at disposal | Office layout and allocation records; visitor logs; absence of dedicated space for parent personnel |
| Activity is preparatory or auxiliary | Written scope; job descriptions; sample outputs showing information gathering rather than commercial engagement |
| No contract-concluding authority in India | Delegation of authority matrix; approval workflows; correspondence showing negotiation conducted overseas |
| Agent is independent | Evidence of multiple principals; risk borne; pricing autonomy; own infrastructure |
| Service days below threshold | The day-count register, maintained contemporaneously |
| Secondees employed by the Indian entity | Employment contracts; Indian payroll records; reporting lines; appraisal documents |
| Below SEP thresholds | Revenue analysis by customer location; user analytics with the counting methodology documented |
The pattern across every row is the same: the evidence exists at the time or it does not exist. A delegation matrix drafted in response to a notice, describing authority as it was three years ago, is not persuasive and is visibly late.
16. Twelve mistakes that create permanent establishments
- Letting a liaison office negotiate. Each step is defensible; the aggregate is a sales function.
- Signing offshore what India negotiated. The “plays the key role” limb closed this route.
- Not counting days. Service PE thresholds are breached by arithmetic, not by intent.
- Missing enterprise-day aggregation. Four people for six weeks each can breach a 90-day threshold together.
- Assuming an EOR removes the risk. What the person does decides it, not who issues the payslip.
- Starting a secondment without deciding its characterisation. The position cannot be constructed afterwards.
- Marking up a secondment recharge without considering the PE consequence. A mark-up is what service fees have.
- Calling a distributor independent while it serves one principal on the principal’s instructions.
- Indian staff using the parent’s email domain and titles. Free to avoid; expensive in evidence.
- Splitting a construction project across group companies to stay below the threshold. A known target.
- Assuming SEP is irrelevant because there is no office. SEP exists precisely for that case.
- Scaling India digital revenue from a non-treaty jurisdiction without assessing SEP first.
17. Annual review checklist
- Day-count register complete for every group employee who entered India, by person and project
- Aggregate days tested against the applicable treaty threshold, using that treaty’s counting method
- Any premises used by group personnel identified, with the basis of use documented
- Liaison office activity reviewed against its permitted scope, in practice not on paper
- Delegation of authority matrix current, and consistent with how contracts were actually concluded
- Correspondence samples retained showing where negotiation took place
- Distributor and agent arrangements tested against the independence indicators
- Every secondment reviewed: agreement, reporting lines, recharge basis, payroll, days
- Indian personnel’s email domains, business cards and titles consistent with the intended position
- Indian revenue and user numbers tested against the SEP thresholds, with methodology documented
- Treaty position confirmed, including tax residency certificate and any limitation on benefits article
- Any equipment or servers in India assessed for fixed place exposure
- Position documented in a dated file, alongside the transfer pricing documentation and the board records approving any change in the India operating model
Not sure whether you already have one?
Most permanent establishments are discovered in an assessment, not in planning. A review before the first notice is a different exercise from a defence after it. Tell us what your group’s people actually do in India and we will tell you where the exposure sits, what evidence you should be keeping, and what can still be fixed prospectively.
18. Frequently asked questions
Q1. What is a permanent establishment in India?
A permanent establishment is a fixed place of business through which a foreign enterprise carries on business, or a dependent agent who habitually concludes contracts or plays the key role in concluding them on its behalf. The test is governed by Article 5 of the applicable tax treaty and, in the absence of a treaty, by the business connection provisions of the Income-tax Act.
Q2. Which sections govern permanent establishment under the Income-tax Act, 2025?
Business connection and permanent establishment are addressed at Section 9(9)(a) and Section 177(3)(c) of the Income-tax Act, 2025, which came into effect from 1 April 2026. Significant economic presence sits at Section 9(8)(d), with thresholds prescribed by Rule 13 of the Income Tax Rules, 2026. Older material citing Section 9(1)(i) and its Explanations refers to the 1961 Act framework.
Q3. Can a foreign parent be taxed in India without any Indian entity?
Yes. A permanent establishment arises from conduct, not from registration. A dependent agent concluding contracts, personnel furnishing services beyond the treaty day threshold, premises at the enterprise’s disposal, or significant economic presence above the prescribed thresholds can each create Indian taxable presence with no Indian company, branch or office ever having been established.
Q4. Does an Indian subsidiary automatically create a permanent establishment of its parent?
No. A subsidiary is a separate legal person, and the mere existence of a subsidiary does not create a PE of the parent. Exposure arises where the subsidiary acts as a dependent agent for the parent, where parent personnel use the subsidiary’s premises to conduct the parent’s business, or where the parent furnishes services in India through its own personnel beyond the treaty threshold.
Q5. How many days trigger a service PE in India?
It depends on the treaty, commonly 90 or 183 days within any twelve-month period. Read your specific treaty for three things: the number of days, whether the window straddles financial years, and whether days are aggregated across personnel and across associated enterprises. Enterprise-day aggregation means four people for six weeks each can breach a 90-day threshold together.
Q6. Our contracts are signed outside India. Does that avoid an agency PE?
Not by itself. Indian domestic law treats a person who habitually concludes contracts or plays the key role in concluding them as creating a business connection. Where Indian personnel identify the customer, negotiate terms and agree price, and the overseas signature is a formality, the location of signature is not a defence. The substantive work determines the outcome.
Q7. Does using an employer of record eliminate permanent establishment risk?
No. An EOR changes who employs the individual, not what the individual does. If the person negotiates with Indian customers, plays the key role in concluding contracts or furnishes the foreign enterprise’s services in India, the PE analysis is unchanged. An EOR is a legitimate and useful arrangement for a market test, but it is not a PE shield.
Q8. Is a liaison office a permanent establishment?
Not if it stays within its permitted scope of representation, promotion and communication. It becomes one when it begins negotiating commercial terms, quoting prices, accepting orders or holding stock. That drift creates two problems at once: a FEMA contravention for operating outside permitted activities, and a permanent establishment of the parent with tax on attributable profits.
Q9. Why is secondment such a high-risk arrangement?
Because whether the parent is rendering services in India through its own personnel, or the individuals have genuinely become employees of the Indian entity, turns on facts rather than labels. Control, reporting lines, who bears the cost and risk, whether a mark-up is charged, and whose payroll runs all matter. Where the parent retains control and the services exceed the treaty day threshold, a service PE can arise.
Q10. Does a mark-up on a secondment recharge matter?
Yes, in both directions. A pure reimbursement of salary cost without mark-up is more consistent with the Indian entity being the employer. A mark-up looks like a service fee, which supports the argument that the parent is rendering a service. Because removing the mark-up may create a transfer pricing question, the two positions must be designed together rather than separately.
Q11. What are the SEP thresholds in India?
Either ₹2 crore of transaction value with persons in India in a year, or systematic and continuous solicitation of business or interaction with more than 3 lakh users in India. Rule 13 of the Income Tax Rules, 2026 carries these forward from Rule 11UD. Either limb alone is sufficient, so a business below the revenue threshold with a large free user base can still be caught.
Q12. Does SEP apply if we are protected by a tax treaty?
Usually not. SEP is a domestic law provision, and where a treaty applies and its permanent establishment article has not been correspondingly amended, the treaty position generally prevails. SEP therefore bites hardest on non-treaty jurisdictions, or where treaty benefits are unavailable because of a limitation on benefits article or the absence of a valid tax residency certificate.
Q13. Does buying goods in India for export create a permanent establishment?
The Finance Act, 2025 clarified that transactions or activities of a non-resident in India confined to the purchase of goods for the purpose of export do not constitute significant economic presence. Most treaties also treat purchasing as preparatory or auxiliary. Sourcing operations that go beyond purchasing — for example, quality control performed as a service, or sales activity — need separate assessment.
Q14. What tax rate applies to profits attributable to a PE?
Foreign company rates. The base rate is 35%, reduced from 40% by the Finance Act, 2024, with surcharge and cess taking the effective rate to roughly 36% to 38%. That is materially above the approximately 25.17% effective rate available to a qualifying domestic company on the concessional regime, which is one reason an unplanned PE is costly even on modest attributed profit.
Q15. How is profit attributed to a permanent establishment?
The PE is treated as a distinct enterprise, and profits are attributed by reference to the functions it performs, the assets it uses and the risks it assumes. This is a transfer pricing exercise, and head office to PE dealings are treated as international transactions requiring the accountant’s report and documentation. Attribution, not existence, is usually the larger part of the dispute.
Q16. What happens to earlier years if a PE is discovered now?
A PE discovered in year four generally existed in years one, two and three. Each of those years becomes assessable, with interest running from the date the tax was due, plus penalty exposure for failure to file. This historical dimension is what distinguishes PE from most other Indian tax risks and why a prospective review is worth substantially more than a retrospective defence.
Q17. Do servers or cloud infrastructure in India create a PE?
It depends on control and function. Third-party cloud hosting is generally distinguishable. Equipment at the enterprise’s own disposal in India, performing more than preparatory or auxiliary functions and operated by or for the enterprise, can constitute a fixed place of business. Pure remote delivery from offshore with no Indian personnel, agents or dedicated infrastructure generally does not.
Q18. What is the single most useful control against PE risk?
A day-count register: one central record of every day any group employee spends in India, by person, project and purpose, reviewed quarterly against the applicable treaty threshold. It prevents more service PE exposure than any contractual protection, costs about an hour a quarter, and cannot be reconstructed credibly after a notice arrives.