Permanent Establishment: How to Avoid the Risks in 2026

A permanent establishment (PE) is the tax presence that allows a country to tax the profit of a foreign company. Under Brazil's treaties, such as the one signed with Portugal, it arises from a fixed place of business or from an agent with authority to conclude contracts. For anyone with an offshore company, the risk depends on where it actually operates.

What is a permanent establishment and why does it matter if you have an offshore company?

Under treaties, as a rule, a company's profit is taxed only in the country where it is resident. The PE is the exception: if the company operates in another country through a permanent establishment, that other country can tax the profit attributable to it. Art. 7 of the Brazil-Portugal treaty (Decree 4,012/2001) says profits "may be taxed only in that State unless the enterprise carries on its activity in the other Contracting State through a permanent establishment."

For the Brazilian business owner, this shows up in two scenarios:

• •the offshore operates in Brazil (or in a third country) in such a structured way that it creates a PE there;
• •the offshore is, in practice, managed from Brazil, and the structure can be challenged on substance.

The double taxation treaties in force are listed on the Receita Federal treaties page. Each treaty has its own text, so the period or test that applies to one country may not apply to another.

When does an office or fixed place create a PE?

A fixed place creates a PE when the company carries on, wholly or partly, its activity there. Art. 5 of the Brazil-Portugal treaty defines the PE as "a fixed place of business through which the enterprise carries on wholly or partly its activity." The list of examples includes a place of management, a branch, an office, a factory, a workshop and places of extraction of natural resources.

Three points in the same article tend to decide the case:

The nine-month period belongs to this treaty. Other treaties set different periods, so the applicable text must be checked before any decision. The exception for "preparatory or auxiliary" activities also has a limit: if the activity of the place is a core part of the company's business, it stops being auxiliary.

In practice, the sensitive point is the room that "only helps." An office where the team negotiates prices, closes sales or provides the offshore's main service is hardly merely auxiliary.

When does an agent or representative create a PE?

An agent creates a PE when acting on behalf of the company and having, and habitually exercising, authority to conclude contracts in its name. Art. 5, paragraph 5, of the Brazil-Portugal treaty provides exactly that. The exception applies to those who carry out only preparatory or auxiliary activities.

Paragraph 6 of the same article protects the independent agent: a broker, general commission agent or other agent acting in the ordinary course of their business does not create a PE merely by intermediating.

In the classification, what matters is who actually decides. If a partner or employee in Brazil sets prices and accepts contracts for the offshore, what the contract says helps little. The analysis looks at what happens in practice.

Can a partner's or employee's home office create a PE?

It can, but not automatically. Art. 5 of the Brazil-Portugal treaty requires a "fixed place of business" used by the company. The text I read does not mention home offices, so the answer depends on the facts: does the company use the home as a place of business on a continuing basis, or does the professional just work from home for convenience?

The signs that tend to weigh most are:

• •the offshore has no other place where its business is conducted;
• •the person at home negotiates and closes contracts in the offshore's name;
• •the company pays for or controls the space as if it were its office.

When the remote work is by an employee who only performs support tasks, the risk tends to be lower. Even so, there is no safe answer without examining the applicable treaty and the employment contract. For remote teams, see also the guide on how to hire an international remote team with compliance and the article on tax implications of cross-border remote work.

Does a digital presence, such as a website or a server, create a PE?

The text of art. 5 of the Brazil-Portugal treaty does not mention websites, servers or online sales. It speaks of a fixed place of business and of an agent with authority to conclude contracts. For that reason, selling to Brazil through a website alone does not appear there as a PE scenario.

That does not close the question. Each country may have its own rules for taxing digital services, and the applicable treaty may be worded differently from the one I read. If your operation is digital, confirm the treaty of the country where the offshore is located and the country where the customers are.

What changes with the MLI and the BEPS project?

The MLI (the OECD Multilateral Convention) amends existing treaties to incorporate BEPS measures, without renegotiating them one by one. The change reaches only the treaties both countries have listed, and only after the convention enters into force for both.

On Brazil, what the OECD's official list shows, as of September 15, 2026, is:

• •Brazil signed the MLI on October 20, 2025;
• •the column for deposit of the instrument of ratification, acceptance or approval is blank for Brazil;
• •the list brings together 107 jurisdictions, signatories and parties combined.

In practical terms, until the MLI is in force for Brazil, the original text of each treaty applies. This may change, and the OECD list is updated. For the background of the project, read the guide on BEPS actions for Brazilians.

What is the difference between a PE and the taxation of controlled companies under Law 14,754/2023?

The PE decides which country can tax the foreign company's profit. Law No. 14,754/2023 (Lei 14.754/2023) deals with something else: how an individual resident in Brazil is taxed on the profits of entities they control abroad. The two analyses can happen at the same time.

Under the law, the text says that:

• •profits of controlled companies abroad of individuals resident in the country, in the cases of art. 5, are taxed on December 31 of each year;
• •the income is subject to individual income tax (IRPF) in the annual adjustment, at a rate of 15%, with no deduction from the tax base (art. 2, § 1);
• •entities in which the individual has a preponderant say in decisions or more than 50% of the capital or profits are considered controlled (art. 5, § 1);
• •the annual regime applies to a controlled company located in a favored-taxation country, or benefiting from a privileged tax regime, or with own active income below 60% of total income (art. 5, § 5).

This means the offshore structure has to make sense on both sides: that of the treaties and that of Brazilian law on controlled companies. To plan safely, the OffshoreProz compliance team and the corporate structures service cover this design.

How do you reduce PE risk in practice?

Reducing PE risk is a matter of facts and documentation, not of a contract clause. Follow this roadmap:

1. •Identify the applicable treaty. Check whether there is a treaty between the offshore's country and the country where the activity takes place, and read its art. 5.
2. •Map who decides and where. Record where the directors are, where contracts are approved and who negotiates.
3. •Review who can sign. Someone in the country of the activity with authority to close contracts in the offshore's name is the highest-risk point.
4. •Delimit support activities. Separate, in writing, what is preparatory or auxiliary from what is a core part of the business.
5. •Keep proof of substance. Minutes, contracts, bank accounts and meeting records should reflect the reality of the operation. See the tax planning service and the jurisdiction comparison.
6. •Reassess when the operation changes. Hiring someone in Brazil, opening an office or changing the director can change the conclusion.