PE is the gateway concept of international tax. A foreign company can sell into India without being taxed in India — but if it has a PE in India, the part of its profits attributable to that PE is taxed under Indian law. For a foreign company with an Indian subsidiary, the question becomes: are activities being conducted in India that go beyond what the subsidiary alone is doing, and could they be attributed to the foreign parent?
The three PE tests
- Fixed-place PE — a physical place of business (office, warehouse, branch) in India through which the foreign company's business is wholly or partly conducted.
- Service PE — services rendered in India by the foreign company's employees or other personnel for a duration exceeding a treaty-specified threshold (typically 90 days in 12 months).
- 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 conclusion of contracts.
Fixed-place PE — what counts
A fixed place of business doesn't have to be a leased office. It can be a project site, a server, a stall at a trade show held over time, even a hotel room used regularly. The two tests are 'fixed' (geographically and temporally stable) and 'business' (the foreign company's core activities, not just preparatory or auxiliary).
Practical examples of what creates fixed-place PE for a foreign tech company:
- Foreign sales executives visiting India 8 months a year, using the Indian subsidiary's office as their base, signing customer contracts on the parent's letterhead.
- Foreign company's CTO permanently relocating to Bengaluru and continuing to lead global R&D from there.
- Servers physically located in India that perform the foreign company's revenue-generating computations.
Service PE — the most common trigger
Most DTAAs include a service PE clause: if the foreign company's employees (or personnel engaged by them) render services in India for more than the treaty-specified period — usually 90 days within any 12-month period — a service PE is triggered.
The trap is that the 90-day count is aggregated across employees and tasks. Five different employees each visiting for 20 days adds up to 100 days. Once you cross, profits attributable to those services become taxable in India.
PE risk diagnostic, included in our Setup plan
FastLegal's tax specialist runs a PE diagnostic at the start of every engagement — maps your subsidiary scope, your parent's intended India activities, employee travel patterns and contract-signing flows. We tell you in plain English where you sit on the PE risk axis and what to change. The diagnostic is included in our Subsidiary Setup engagement.
Dependent-agent PE
Agency PE arises when a person in India (typically an employee of the subsidiary or an unrelated agent) habitually concludes contracts on behalf of the foreign parent, or habitually plays the principal role leading to contract conclusion. The 2017 BEPS-influenced amendments to DTAA Article 5 broadened this — even agents who don't formally sign contracts but materially negotiate them can trigger PE.
Operational guardrails that reduce agency-PE risk:
- The Indian subsidiary's employees should not have authority to bind the foreign parent. Their contracts are with the subsidiary, not the parent.
- Customer contracts for the foreign parent's products should be signed by foreign parent personnel located outside India — even if the negotiation happened in India.
- If the Indian subsidiary provides marketing / sales-support services to the parent, structure those as services for which the parent pays the subsidiary at a fair transfer-pricing margin (cost-plus 12-18%).
- Document everything — board minutes, intercompany agreements, signed contracts — to support the position at audit.
What if PE is triggered?
If PE is triggered, the profits attributable to the PE are taxable in India at the non-resident rate — currently 35% (Finance Act 2025) plus surcharge plus 4% cess. The Indian tax authority uses functional, asset and risk (FAR) analysis to determine the attribution. Most cases settle through Mutual Agreement Procedure (MAP) under the DTAA, which is a 18-36 month process.
Operationally, a triggered PE means: file a return in India, get a PAN for the foreign parent, prepare audited financial statements for the Indian operations, and litigate the attribution percentage. Not impossible — but materially expensive compared to clean prevention.
Frequently asked questions
Does our Indian wholly-owned subsidiary itself create a PE for the foreign parent?+
Not automatically — a subsidiary is not a PE of its parent. But the conduct of the subsidiary's officers can create PE for the parent if those officers act for the parent. Keep roles, authorities and contracts cleanly separated.
Does sending US executives to India for 2 weeks for a sales pitch create PE?+
Two weeks alone, no. But aggregate the visits across 12 months — if total time exceeds 90 days under the US-India treaty and they're rendering services for which the parent earns revenue, service PE risk increases sharply.
What about remote employees in India working for the foreign parent directly (no subsidiary)?+
This is the highest-risk pattern. A US company employing an Indian engineer who works from home in Bengaluru directly for the US parent creates fixed-place PE risk (the home office can be a 'fixed place'), agency PE risk, and labour-law misclassification risk. Use an EOR or subsidiary.
Can we cure PE risk retroactively?+
Partially. Voluntary disclosure under the Vivad se Vishwas / settlement schemes (when open) lets you settle past PE exposure with reduced penalties. Future operations should be restructured to avoid recurrence.
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