What is a permanent establishment?

A permanent establishment (PE) is a fixed place of business — like an office, branch, or factory — through which a foreign enterprise carries on business in another country. Under a US tax treaty's business-profits article, a foreign company's business profits are only taxable in the US if it has a PE here, and only to the extent the profits are attributable to that PE.

Does having a US customer create a permanent establishment?

No. Merely selling to US customers, shipping goods to the US, or having US clients does not by itself create a PE. A PE generally requires a fixed place of business in the US or a dependent agent who habitually concludes contracts in the company's name. Sales alone, without that physical or agency presence, don't cross the threshold.

What activities are excluded from creating a permanent establishment?

Most treaties list preparatory or auxiliary activities that don't create a PE even at a fixed location — such as storage, display, or delivery of goods, maintaining a stock of goods solely for processing by another enterprise, or a fixed place used only for purchasing or collecting information.

What do I file if I have a US permanent establishment?

A foreign corporation with a US PE files Form 1120-F to report and pay US tax on the business profits attributable to the PE, taxed on a net basis at graduated corporate rates. Even without a PE, filing a protective Form 1120-F preserves your right to deductions if the IRS later asserts you had one.

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Tax Treaty Planning

Permanent Establishment: When US Activity Creates a Taxable Presence Under a Treaty

A permanent establishment is the treaty threshold that turns a foreign company's US activity into US-taxable business profits. Cross it and you owe net US tax and a return — here's what triggers it and how to stay clear.

SMAART Tax Team

February 25, 2026

7 min read