Table of Contents
Most foreign companies that end up with an Indian tax bill never decided to create a taxable presence. A permanent establishment in India exposure is built out of operating facts — where people sit, who signs what, how long a project runs — rather than out of a registration. India can tax the profits attributable to that presence, usually alongside withholding obligations nobody budgeted for, and the assessment typically arrives years after the facts that created it. It is far cheaper to design around than to argue about.
What a Permanent Establishment in India Actually Is
A permanent establishment is a threshold concept. Below it, India generally cannot tax a foreign company’s business profits; above it, it can tax the profits attributable to the Indian presence. The threshold sits in the double taxation avoidance agreement between India and the company’s home country, read alongside Indian domestic law.
Two features make it difficult to manage. First, it is substance-driven — the test looks at what is happening on the ground, not at what the group’s org chart says. Second, it is retrospective: the facts accumulate quietly, and the question is usually asked by an assessing officer looking at a period that closed two or three years earlier, when the people involved have moved on and the emails are hard to reconstruct.
That combination is why a permanent establishment review belongs at the point of structuring, not at the point of assessment.
1. A Fixed Place of Business
The classic case: premises at the foreign company’s disposal through which its business is wholly or partly carried on. A branch, an office, a workshop. The requirement is disposal and a degree of permanence rather than ownership — desk space in a customer’s building, used consistently by the foreign company’s staff, can satisfy it.
Companies often assume that because they never signed a lease, there is no fixed place. The question is whether the space was in substance available to them and used for their business, and the answer can be yes without a single rupee of rent.
2. An Agency PE: Someone Habitually Concluding Contracts
A dependent agent who habitually exercises authority to conclude contracts on the foreign company’s behalf can create a permanent establishment even where there are no premises at all. In many treaties the test extends to an agent who habitually plays the principal role leading to the conclusion of contracts that are then routinely signed without material modification.
This is the pattern that catches sales organisations. A country manager who negotiates commercial terms in India while head office applies a signature afterwards is, in substance, the person concluding the contract. Formal signing abroad does not by itself answer the question.
An independent agent acting in the ordinary course of their own business is treated differently — but independence is a factual test about economic and legal dependence, not a label applied in the agreement.
3. A Service PE: People on the Ground for Long Enough
Many of India’s treaties contain a service PE clause: furnishing services through employees or other personnel in India for more than a specified aggregate period within a twelve-month window creates a permanent establishment, with no premises needed.
The threshold is a duration test, and it aggregates. A succession of short visits by different engineers on the same project can cross it where no single visit comes close. Groups that manage this well track presence days by project rather than by individual, because the clause is usually drafted around the project and the connected activity, not the person.
The specific threshold and the way days are counted vary between treaties. It has to be read in the applicable agreement rather than assumed from another country’s.
4. A Construction or Installation Site That Runs Long
Building sites, construction, assembly and installation projects generally become a permanent establishment once they exceed a duration specified in the treaty. Supervisory activity connected to such a site is often caught by the same clause.
Delay is the risk here, and it is a commercial risk rather than a tax one. A project scoped comfortably inside the threshold that then slips — for reasons that have nothing to do with tax — can cross it, and the consequence applies to the project as a whole rather than to the overrun.
5. A Subsidiary That Is Not Operating at Arm’s Length
Having an Indian subsidiary does not, by itself, create a permanent establishment of the parent. A subsidiary is a separate taxpayer, and that is one of the reasons the structure is chosen.
The protection is not automatic, though. Where the subsidiary’s premises are in substance at the parent’s disposal, or its staff habitually conclude contracts for the parent, the subsidiary’s existence does not prevent a finding that the parent itself has a presence. Intra-group service arrangements that are not priced and documented at arm’s length make that argument easier to run, which is one of several reasons transfer pricing documentation and permanent establishment risk are best reviewed together rather than in separate workstreams.
6. Significant Economic Presence: Tax Without Any Physical Presence
This is the one most likely to be out of date in anything written before 2025, and it has moved recently.
India previously taxed much of the inbound digital economy through the equalisation levy. That regime has been withdrawn: the 2% levy on e-commerce supply of goods and services ended on 1 August 2024, and the 6% levy on online advertising was removed from 1 April 2025. No equalisation levy is now in force.
What remains is the significant economic presence concept in section 9(1)(i) of the Income Tax Act, a domestic-law mechanism that can attribute Indian-source income to a non-resident on the basis of revenue or user-interaction thresholds, with no office and no people in India. Receipts that were previously settled by paying the levy and relying on the corresponding exemption are now examined under section 9(1)(i) and the applicable treaty instead.
For a foreign digital or SaaS business selling into India, the practical effect is that a question which had a simple mechanical answer now has a structural one. The current text of the provision is published by the Income Tax Department, and the position should be read as it stands for the relevant assessment year rather than as it stood when the levy existed.
What Follows If You Have a Permanent Establishment in India
A permanent establishment is not a penalty in itself. It is a filing and attribution obligation, and the consequences are cumulative.
- Profits attributable to the Indian presence become taxable in India, generally at rates applicable to foreign companies.
- A return obligation arises, often for years already closed, together with interest.
- Indian customers may face withholding obligations on payments to the foreign company, which tends to be how the issue first surfaces commercially.
- Attribution becomes the central argument — how much of the global profit belongs to the Indian activity — and it is far harder to evidence after the fact than contemporaneously.
- Transfer pricing documentation for related-party dealings with the presence comes into scope.
The cost is rarely the headline tax. It is the combination of interest over several years, the attribution argument conducted without contemporaneous records, and the disclosure that has to be made the next time the group is diligenced.
Preparatory and Auxiliary Activity: The Exception That Is Narrower Than It Looks
Treaties carve out activities that are preparatory or auxiliary in character — storage, display, purchasing, collecting information. Foreign groups lean on this exception heavily, and it is narrower than its reputation.
The test is whether the activity is remote from the actual realisation of profits, measured against the enterprise’s business as a whole. An activity that is a core part of what the company sells is not auxiliary merely because it is small, and an office described as doing “market support” that in practice drives the sales pipeline will not qualify.
Two further points catch groups out. First, the exception is tested against the whole enterprise, so an information-gathering function that is incidental for a manufacturer may be central for a research business. Second, many modern treaties include an anti-fragmentation rule that aggregates closely related activities split between a group’s entities, so dividing a function in two does not restore the exception. This is the clause most often cited in support of a liaison office, and the one most often read too generously — it is a reason to document what the office actually does, not a reason to assume a permanent establishment in India cannot arise.
Reviewing Permanent Establishment in India Before It Bites
A permanent establishment review is a factual exercise, not a legal opinion exercise, and it is cheap while the structure is still fluid.
- Map who is actually in India, for how long, on what, and under whose direction — by project, not by headcount.
- Read the contract chain as a buyer would. Who negotiates, who approves, where is the commercial decision really made?
- Check the applicable treaty, not a generic one. Service PE thresholds and agency wording differ materially between India’s agreements.
- Price and document intra-group arrangements properly, so the subsidiary’s separateness is evidenced rather than asserted.
- Re-run the review when the facts change — a new country manager, a project overrun, a shift from distribution to direct sales.
None of this is about avoiding Indian tax. It is about knowing which structure you are in before someone else decides for you, and being able to show the working.
How PerspireIP Can Help
PerspireIP reviews permanent establishment exposure as part of India entry, due diligence and compliance work — mapping the operating facts against the applicable treaty before the structure hardens, and documenting intra-group arrangements so the position holds up when it is tested. Tell us how you operate in India and we will scope the review and quote before anything starts.
Frequently Asked Questions
Does having an Indian subsidiary create a permanent establishment for the parent?
Not by itself. A subsidiary is a separate taxpayer and its existence alone does not create a permanent establishment of the parent. The protection fails where the facts undercut it — for example where the subsidiary’s premises are in substance at the parent’s disposal, or its staff habitually conclude contracts on the parent’s behalf.
How long can employees work in India before creating a permanent establishment?
It depends on the applicable double taxation avoidance agreement. Many of India’s treaties contain a service PE clause triggered by furnishing services through personnel in India beyond a specified aggregate period within a twelve-month window. The threshold and the day-counting method vary between treaties, and short visits by different people on the same project generally aggregate, so it must be read in the specific agreement.
Is the equalisation levy still payable in India?
No. The 2% equalisation levy on e-commerce supply of goods and services ended on 1 August 2024 and the 6% levy on online advertising was removed from 1 April 2025. No equalisation levy is currently in force. Inbound digital receipts are now considered under the significant economic presence provisions in section 9(1)(i) of the Income Tax Act and the applicable treaty.
Can a foreign company be taxed in India without any office or staff there?
Yes, potentially. The significant economic presence concept in section 9(1)(i) can attribute Indian-source income to a non-resident on the basis of revenue or user-interaction thresholds with no physical presence at all, subject to the applicable treaty.
What happens if a permanent establishment is found after the fact?
Profits attributable to the Indian presence become taxable, usually for periods already closed and with interest. A return obligation arises, Indian customers may have had withholding obligations on their payments, and the attribution of profit has to be argued without contemporaneous records — which is generally the most expensive part.
When should we run a permanent establishment review?
Before the operating model hardens, and again whenever the facts change materially — a new country manager, a move from distribution to direct selling, a project that overruns its planned duration, or a shift in how contracts are negotiated. It is a factual mapping exercise and is far cheaper done contemporaneously than reconstructed during an assessment.