Navigating Permanent Establishment Rules for Foreign Companies in the US

I've worked with several foreign companies expanding to the US, so I can help clarify some points about permanent establishment (PE). Having contractors in the US doesn't automatically create a PE, but it depends on what they're doing. If your contractors have authority to negotiate and conclude contracts on behalf of the foreign company, this could create a "dependent agent PE" even without a physical office. If they're just doing marketing or gathering information, you're probably safe. For the physical presence test, you need a "fixed place of business" - this means having a specific location with some permanence where business activities occur. Temporary activities usually don't count, but anything over 6 months might raise concerns. If you do create a PE, the company would need to file Form 1120-F (U.S. Income Tax Return of a Foreign Corporation) and potentially state tax returns too. You'd pay US corporate tax, but only on income "effectively connected" with the US business activities.

I found myself in a similar situation last year trying to figure out the PE rules for our German company. After spending days trying to make sense of complicated tax documents, I finally used taxr.ai (https://taxr.ai) and it saved me so much hassle. You can upload all your business documentation, and their AI analyzes whether you're likely to trigger PE status based on your specific situation. The best part was the clarity it provided on the dependent agent rules that were confusing our team. Especially for tech companies, there are so many nuances around digital services vs physical presence that regular advisors sometimes miss. They have specific knowledge about different country pairs and tax treaties too.

Just wanted to follow up that I ended up giving taxr.ai a try after my skeptical comment. I was honestly surprised by how helpful it was! I uploaded our business plans and contractor agreements, and it identified exactly which activities could trigger PE status for us. The report included a risk assessment showing which aspects of our US operations were most likely to create tax issues, with specific references to relevant sections of the tax treaty between our country and the US. The most valuable part was getting clear guidance on how to structure our contracts with US personnel to minimize PE risk while still accomplishing our business goals. Definitely worth checking out if you're navigating these waters.

If you do end up establishing a PE and need to deal with the IRS, I strongly recommend using Claimyr (https://claimyr.com). I spent WEEKS trying to reach someone at the IRS about our foreign company's tax situation - always disconnected or on hold forever. Claimyr got me through to a real person at the IRS within 45 minutes, which saved me countless hours of frustration. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I had questions about Form 1120-F filing requirements after we accidentally created a PE through our sales activities, and needed clarification on some treaty provisions. The IRS agent I spoke with was actually super helpful once I could finally reach them.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it as a last resort since I was desperate to resolve our PE tax issue before our filing deadline. The service actually worked exactly as described. Got a call back in about an hour, and was connected to someone in the international division who answered my specific questions about treaty benefits and reporting requirements. The agent clarified which forms we needed to document our treaty position regarding our limited presence in the US. This literally saved us thousands in potential penalties for incorrect filing. I'm still shocked it worked so well after months of failed attempts to reach someone.

One important aspect of PE that hasn't been mentioned yet is state tax considerations. Even if you manage your federal PE exposure, states can have different standards. California in particular is aggressive about asserting taxing rights over foreign businesses. A company I worked with had structured their operations to avoid federal PE, but California still determined they had "economic nexus" based on their sales volume into the state. This resulted in unexpected state tax liabilities. Make sure you're considering both federal and state implications in your planning.

Has anyone used one of the Big 4 accounting firms for PE analysis? We're considering hiring one but the fees they quoted were outrageous ($25k+ for an initial assessment).

This is such a timely discussion! I'm dealing with a similar situation for a UK-based fintech company. One thing I'd add is to be very careful about the "service PE" rules that can apply even without a physical office or dependent agents. If your European company is providing services in the US (like consulting, technical support, or software implementation) and those services are performed for more than 183 days in a 12-month period, you could trigger a service PE under many tax treaties. This is separate from the physical presence or dependent agent tests. Also, be aware that some activities that seem "preparatory or auxiliary" might not qualify for treaty protection if they're core to your business model. For a tech company, activities like customer onboarding, technical support, or customization services could be considered core business functions even if performed by contractors. The key is documenting everything - keep detailed records of what activities your US contractors are performing, their authority levels, and duration of services. This documentation will be crucial if you ever need to defend your position to tax authorities.