Does hiring through an EOR keep you from having a permanent establishment abroad?

Summary

No. An employer of record settles who employs the worker; permanent establishment is a corporate tax question about whether your company is doing business in that country. Tax treaties look at fixed places of business and at who habitually exercises authority to sign contracts binding on your company, and they do not ask who runs payroll. A salesperson hired through an EOR who closes deals locally can still give your company a permanent establishment there.

Two questions that get mixed up

A permanent establishment, or PE, is the threshold at which a foreign company becomes taxable on business profits in another country. IRS Publication 901 says the term "generally mean[s] a fixed place of business." Its treaty summaries show why the threshold matters: under the treaties with Belgium and Canada, a resident's business profits are exempt from U.S. income tax unless the individual has a permanent establishment in the United States, and profit attributable to a PE is taxed.

When a U.S. company hires abroad, the other country makes that call under its own law and its treaty with the United States. The U.S. Treasury publishes a Model Income Tax Convention as its treaty template, and Article 5 of the 2016 version lays out what a PE test looks at.

What Article 5 actually tests

• A fixed place of business. Paragraph 1 defines a PE as "a fixed place of business through which the business of an enterprise is wholly or partly carried on," and paragraph 2 lists offices, branches, factories and workshops. If you lease the office your EOR employee works from, the EOR contract does not take that office out of the analysis.
• Authority to conclude contracts. Under paragraph 5, a person who is not an independent agent and who "has and habitually exercises" in the country "an authority to conclude contracts that are binding on the enterprise" gives the enterprise a PE there. The test is about authority. Employment status does not appear in it, so a country manager on an EOR payroll who negotiates and signs customer contracts is the textbook case.
• The preparatory or auxiliary carve-out. Paragraph 4 excludes places used only for storage, display, gathering information and other activities "of a preparatory or auxiliary character." An engineer working on internal tooling and a salesperson generating revenue can sit on the same EOR invoice and land on opposite sides of this line.

Treaties draw the line in different places

A model is a template. In the 2016 U.S. Model, a building site or construction project becomes a PE only if it lasts more than twelve months. Publication 901 notes that under the treaty with Bulgaria, you may be considered to provide services through a permanent establishment in the United States even without a fixed place of business. Under a clause like that, sending people to do the work can be enough.

So "it's only one person" and "the EOR is the employer" are not answers that travel from one country to the next. The job duties, signing authority, work location and time on the ground have to be read against the specific treaty and the local law, and an EOR sales call does not do that reading for you.

Sources

• https://home.treasury.gov/system/files/131/Treaty-US-Model-2016_1.pdf
• https://www.irs.gov/pub/irs-pdf/p901.pdf

Related on this site

• Does an employer of record take care of all the compliance when you hire abroad?
• If you hire through an EOR, who actually approves a raise or a firing?
• How do you get someone working for you in a country where your company has no entity?
• Employer of record or your own entity: where the number flips