Guide to Permanent Establishment Tax in India

As per the Indian Income Tax Act, Permanent Establishment Tax is defined as a fixed place of business where it is fully/partially carried out by the enterprise. As per Double Tax Avoidance Agreement, Article 5(1) .it is an activity that generates income on being a connection with the business is taxable and all other business connection not in contact in India is non-taxable.

Foreign companies get tax reductions under Double Taxation Evasion Treaties and they pay taxes in their home countries. But if they have PEs in India, they should pay taxes for the income they have created in India. Thus, Permanent Establishment makes foreign companies’ Indian income taxable in India. Permanent Establishment Tax consultant helps the businesses with services relating to Permanent Establishment Tax in India 

Establishment in India (as per Article 5 of the Income Tax Treaty of India and foreign countries) if the foreign enterprise would have a fixed place of business in India or doing business in India through:

• A place of service or providing a service 
• A place of work eg: branch, office, workshop, warehouse, premises, factory, etc.
• An agent who exercised authority to conclude business on behalf of a foreign company/delivers contracts or goods or other merchandise.
• A site of installation, construction, or development projects where assembling & supervision is required

To look further into it there are Permanent Establishment Tax rules, DTAA that must be regarded:

1) Fixed Permanent Establishment:

Under the fixed place clause of Article 5(1) of the Income Tax Treaty between India and foreign country Permanent Establishment is there when:  

• Have a fixed place of business 
• The business of a foreign enterprise is fully or partially carried upon

As per law, both these conditions must be fulfilled for the Permanent Establishment. Often at times, Indian affiliates carry out business on behalf of foreign clients but because there is no place of business a permanent establishment cannot be formed.

2) Permanent Establishment Agency:

Under the agency clause of Article 5(4) of the Income Tax Treaty between India and a foreign country. This scenario exists when a foreign company has an agent on whom it depends. This requires 3 conditions:

• To conclude foreign contracts on behalf of the foreign client & exercising necessary authority.
• Secure orders and contracts for foreign clients on a whole or almost whole business.
• Maintenance of stock & goods or merchandise on behalf of the client.

Agency Clause of Permanent Establishment Tax comes into power when the agent will perform the conditions stated above, who is dependent on the Foreign Company and will function on his behalf

3) Permanent Establishment Service:

Permanent Establishment tax India – Service permanent establishment (P.E.) is an international tax concept under which services provided by a non-resident may give rise to a Permanent tax in the source country if the services are provided beyond a certain period. If employees of Foreign Client or the Foreign Company provide, furnish, or perform Permanent Establishment Tax services in India other than services covered under Royalties, fees, etc for a period.

• Employees working for a foreign company in India receiving Income from Foreign Company
• Performance of Permanent Establishment services in India by Foreign Employees on behalf of Foreign Company
• If such a situation where both conditions are not fulfilled, then there is no Service Permanent Establishment. Let us say 2 foreign nationals are coming to work in India but their payments are borne by Indian Companies then they are not covered under this. 
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