The risk of a permanent establishment (PE) is one of the main issues that Estonian companies and board members face when a managing director operates from a foreign country for an extended period. The emergence of a PE means that a foreign country may have the right to tax a portion of the company's profits. This in turn leads to local registration, tax obligations and the risk of potential double taxation.
Below we explain how a board member can work from a foreign country without the company having a permanent establishment in that other country, and what practical measures are recommended.
What is a permanent establishment and why does a board member working abroad pose a PT risk?
A permanent establishment is an economic entity through which a company regularly carries out its business activities in another country. This can take the form of an office, a management center, or a regular workplace for a board member, for example.
The treatment of a non-resident's permanent establishment in Estonian legislation also emphasizes that the substantive conduct of economic activity is decisive, not just the geographical space or occasional activity.
The OECD 2025 updated guidelines on telework and permanent establishment explain that:
- A permanent establishment may also arise from the home office of a board member if it is used for the company's main business activities and is at the disposal of the company;
- However, a home office is not considered to be at the disposal of the company if the board member works from there solely for his or her convenience and does not perform strategic business functions there.
- A board member is the highest decision-maker in a company. If he or she works in a foreign country for an extended period of time and makes important management decisions there, this may, in the foreign country's opinion, provide grounds for considering the company's profits as having arisen in that country.
According to the OECD 2025 guidelines, PT may occur when:
- a board member spends more than 50% of his/her working time in another country and
- his/her activities are commercially significant, e.g. making strategic decisions, concluding contracts or actually negotiating them.
The risk of PT is also higher if the board member is the sole or main decision-maker of the company (founder CEO type role).
How to assess the risk of creating a permanent establishment?
Three main tests according to OECD guidelines
- The updated OECD 2025 guidelines present a three-step test for assessing work from abroad:
- Permanence test – does the board member work in another country regularly and for an extended period of time?
- 50% working time test – is more than half of your working time spent abroad?
Business justification test – is working abroad commercially necessary or is it done for the employee's own convenience?
If working is done at the employee's convenience and the company does not require them to work there, the risk of PT is significantly lower.
In addition, the OECD 2026 analysis confirms that even if a board member works from abroad for more than 50%, PT does not automatically arise - the commercial nature of the activity and whether the company has control over this workplace are also assessed.
How to avoid the creation of a permanent establishment?
Practical methods and tricks:
1. Dokumenteeri, et kaugtöö välisriigist toimub juhatuse liikme soovil, mitte ettevõtte vajadusest
According to OECD guidelines, a key factor in reducing the risk of PT is clear documentation that the remote or home office is being used for the employee's convenience, not at the employer's request.
For example:
- to state in the contract of a board member that working from a foreign country is done at his or her own initiative;
- The company should have demonstrably offered work in Estonia or provided Estonian office space.
This approach has been recognized by the OECD as an important distinguishing factor in excluding PT.
2. Väldi oluliste äriotsuste tegemist välisriigis
A high PT risk arises if a board member:
- concludes contracts abroad,
- negotiates and agrees on the important terms of transactions,
- is responsible for the company's core functions while abroad.
This corresponds to the characteristics of a dependent agent PT, which apply to both the OECD Model Tax Convention and Estonian tax treaties.
Nipp: olulised juhatuse otsused tehakse Eesti pinnal või digitaalselt Eesti asukoha kaudu (koosoleku protokollides viidata otsuse tegemise kohaks Eesti).
3. Veendu, et välisriigis ei oleks ettevõtte käsutuses püsivat töökeskkonda
The formation of a permanent establishment requires that:
- the working environment is at the disposal of the company and
- it is related to the company's business operations.
If the home office of a board member is not at the disposal or under the control of the company (the company does not rent it or give instructions for its use), the PT risk is lower. According to OECD guidelines, a home office is not considered to be at the disposal of the company if the employee chooses it voluntarily and does not perform tasks there that are decisive for the management of the company.
4. Väldi välisriigis töötajate palkamist või seal teenuse osutamist juhatuse liikme kaudu
If a board member:
- manages employees in another country,
- shapes the structure of the company there,
- hires local staff or
- creates a customer base in this foreign country,
then an economic entity may arise in a foreign country that meets the characteristics of a PT (permanent staff, place of income generation).
5. Kontrolli maksulepinguid ja riigipõhiseid erisusi
Estonian tax treaties predominantly follow the OECD model, but the PT criteria and exceptions may vary from country to country.
Tax treaties directly affect how a foreign country assesses home office PT risk, dependent agent PT conditions, and limitations on the duration of construction and project work (e.g., 6 or 12 months).
It is worth regularly checking the list of tax treaties on the websites of the Ministry of Finance and the Ministry of Finance and, if necessary, reading the comments of a specific country on the definition of PT.
6. Loo ettevõttesisene kaugtööpoliitika PT riski maandamiseks
According to OECD 2026 recommendations, companies should create clear internal rules that:
- require a board member to assess PT risk before moving abroad,
- restrict the performance of commercially important operations from abroad,
- regulate the extent to which a board member is authorized to perform contractual acts in a foreign country.
Kokkuvõte
A board member can work safely from abroad if they consciously manage risks.
The creation of a permanent establishment is not automatic, but the role of a board member increases the risk of PT compared to regular employees. However, the OECD 2025 and 2026 guidelines provide clarity: PT risk is avoidable if the company documents its business organization correctly, limits commercially significant activities abroad, and ensures that the work abroad is not at the company's disposal or commercially unavoidable.
The highest level of security is achieved when:
- the decisions of the board are made in Estonia,
- a foreign home office is merely a convenience, not a company requirement,
- a member of the management board does not conclude contracts or make strategically important decisions abroad,
- The company has a well-documented remote work policy.
Author: GROW tax specialist Malle Liivat
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