The concept of permanent establishment (PE) sits at the heart of cross-border tax architecture. It is the test by which a host country determines whether it can tax a foreign company on profits attributable to local activity. Get the PE position wrong and a UK company can find itself with unexpected local tax liability, payroll obligations, and registration requirements in markets it considered to be operating from a distance.
This is the framework we use to assess PE risk for UK enterprises operating across the EU.
The two PE definitions that matter
PE is defined under bilateral tax treaties following the OECD Model Tax Convention. Two definitions matter most in practice.
Fixed-place-of-business PE under Article 5(1) of the OECD Model arises where a foreign enterprise has a fixed place of business through which the business of the enterprise is wholly or partly carried on. Offices, branches, factories, workshops, mines, and certain construction sites qualify. The "fixed" element requires both geographic permanence and temporal duration — typically more than six months for construction projects, with shorter thresholds for other forms of presence.
Dependent-agent PE under Article 5(5) arises where a person, other than an independent agent, acts on behalf of a foreign enterprise and habitually concludes contracts (or plays the principal role leading to the conclusion of contracts) in the name of the enterprise. The 2017 OECD Model expanded this provision under BEPS Action 7 to capture commissionaire arrangements that previously avoided PE characterisation.
Activities that typically create PE risk
Local employees or contractors with authority to bind the company. Warehouses or fulfilment centres operated by the foreign enterprise directly (rather than through an independent 3PL). Sales offices or representative offices that conclude business. Project sites of sufficient duration.
Activities that typically don't create PE risk
Preparatory or auxiliary activities under Article 5(4) of the OECD Model — storage, display, purchasing information, market research, and similar functions. Independent third-party agents acting in the ordinary course of their own business. Third-party 3PL warehouses operated by independent fulfilment providers (subject to anti-fragmentation rules that prevent splitting activity across related parties to stay below thresholds).
The Polish position
Polish CIT Act Article 4a(11) defines permanent establishment for Polish corporate income tax purposes. The definition follows the OECD Model closely. The UK-Poland Double Taxation Convention 2006, Article 5, applies treaty-level PE definitions for UK enterprises operating in Poland.
A separate but overlapping concept — VAT fixed establishment — applies under Council Implementing Regulation (EU) 282/2011 Article 11. A VAT fixed establishment requires sufficient permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it (or to provide services). The two concepts overlap but are not identical; an arrangement can create one without creating the other.
The structural response
The most defensible structural response to PE risk is incorporation. An incorporated Polish spółka z ograniczoną odpowiedzialnością (Sp. z o.o.) is not a permanent establishment of the UK parent — it is a separate Polish taxpayer with its own tax residence, its own corporate income tax position, and its own treaty status. The architecture decision to trade through a subsidiary, rather than to operate through a PE, is itself a primary PE risk mitigation.
Where genuine local activity is required — employees, warehouses, customer-facing functions — operating that activity through an incorporated subsidiary structures the position cleanly. Operating the same activity directly through the UK parent creates PE risk that requires ongoing management.