Permanent Establishment in the USA

An Expert's View about Taxes and Accounting in the United States

Posted on: 3 Jun 2010

PE in the USA

By Aaron N. Wise, Attorney at Law © 2009


As a general principle, the U.S. tax laws seek to impose a tax on every company that is considered to be doing business in the USA. Most U.S. income tax treaties exempt resident companies and individuals of the other treaty country from U.S. federal income taxes on business profits if they do not have a PE in the United States. A Permanent Establishment (PE) is defined therein. A PE in the USA under many of the US tax treaties typically includes a fixed place of business such as a seat of management, branch, an office, a factory, a workshop or a warehouse, used to conduct business in the USA. It also frequently includes a mine, quarry or other place of natural resource extraction in the USA maintained by the foreign resident party; and a building site or construction or installation project of the foreign resident existing in the USA for more than a certain number of months.


If a foreign exporter appoints an American company as its exclusive distributor and delivers all goods f.o.b. non-U.S. port, normally no U.S. income tax liability arises for the foreign exporter on the profits from its sales to the distributor.


If, however, a foreign company believes that it can sell its products better by having its own marketing group in the U.S. or at least having its trained personnel in the USA to assist in the marketing, the company may be considered to have a PE in the USA and be subject to American income tax on the income resulting from the PE and any other U.S. source income effectively connected to the PE.


Some other acts and actions that might give rise to a PE in the USA under many U.S. income tax treaties are:

- You set up a branch marketing sales or marketing office of your company in the USA (whether or not the branch is formally registered).

- You give your U.S. agent the authority to accept purchase orders from your customers or otherwise allow him to do so.

- Your agent uses business cards which list him as a manager for your company. (He holds himself out to the public as an employee of your company.)

- You send your employee to live in the U.S. to help your agent or distributor with technical or marketing problems, or to operate out of your (unincorporated) U.S. sales or marketing office.

- You agree to pay part of the rent of your U.S. agent's or distributor's office or telephone expenses and have your company name listed in the local telephone directory. The foregoing are examples only---many others could be cited.


U.S. income tax treaties typically list certain activities which will not result in the foreign resident company having a PE in the USA. These may include (depending, of course, on the terms of the particular treaty):

(1) exporting to the USA without any fixed placed of business in the USA or without a U.S. agent that regularly accepts orders for goods to be sold;

(2) utilizing a U.S. corporation, that is, one incorporated under the laws of a U.S. state, to conduct the U.S. business (e.g. manufacture or purchase of goods from the foreign parent and sale or resale thereof to U.S. distributors, dealers and customers; or sale of services);

(3) use of U.S. facilities for, or the maintenance in the USA. of, a stock of goods belonging to the foreign enterprise for storage, display or delivery of such goods for their processing by a third party;

(4) maintaining a fixed place of business in the USA for purchasing goods, collecting information for the foreign enterprise, or for activities of a preparatory or auxiliary character (e.g., advertising or scientific research); and

(5) the maintenance by the foreign enterprise or individual of a building site or construction, assembly or installation project in the USA which does not exist for more than the number of months specified in the relevant tax treaty.


The foregoing rules are stated in a general way. Income tax treaty provisions are rather detailed and contain many subtleties. The foreign company’s proposed activity in the USA should be carefully reviewed in advance to determine whether a "PE" in the USA is a material risk for you, and the likely consequences of having one. In general, most foreign companies and individuals will want to avoid having one.


Posted: 03 June 2010

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