Tax presence for companies in the United States: permanent establishment

Tax presence questions in the United States involve multiple layers of authority and a clear distinction between federal and state taxation.

At the federal level, the Internal Revenue Service (IRS) is responsible for audits, enforcement and treaty interpretation in cross-border situations (link).

In parallel, individual U.S. states apply their own corporate income, franchise and sales tax rules. These often rely on economic nexus or factor-based standards that operate independently from federal permanent establishment concepts (link).

Disputes over federal tax matters are handled by the U.S. Tax Court, federal district courts and appellate courts. Case law plays a central role in defining when a foreign business has sufficient U.S. presence to be taxed (link).

In practice, U.S. tax presence assessments are highly fact-driven and often more aggressive than foreign businesses expect, especially where people, sales activity or state-level nexus are involved.

Permanent establishment under U.S. tax treaties

For foreign companies resident in treaty countries, federal income tax exposure is generally assessed under the permanent establishment article of the applicable U.S. tax treaty. Most U.S. treaties broadly follow the OECD model, but are interpreted through extensive domestic case law and IRS guidance.

The IRS focuses on whether a foreign enterprise carries on a U.S. trade or business through a fixed place of business or a dependent agent, with emphasis on actual functions rather than formal thresholds.

Remote employees and home office cases

Remote work and home office arrangements are a recurring source of tax presence risk for foreign companies employing U.S.-based staff.

IRS guidance and audit manuals indicate that a home office may constitute a fixed place of business if it is used on a regular basis for the employer’s business and is effectively at the disposal of the employer. Ownership of the premises is not decisive; functional use is (link).

U.S. courts and professional commentary draw a distinction between employees working remotely for personal convenience and situations where the employer relies on the home office as an operational base. In the latter case, permanent establishment risk increases materially (link).

Unlike some European jurisdictions, the United States does not provide a general safe harbour for long-term remote work. Permanent remote roles are therefore frequently treated as a meaningful tax presence risk.

Dependent agents and sales activity cases

The United States has a long history of litigation involving dependent agents, commissionaire structures and sales representatives.

In the landmark case Taisei Fire and Marine Insurance Co. v. Commissioner, the court examined whether U.S.-based activities performed by agents constituted a dependent agent permanent establishment under the applicable tax treaty (link).

More broadly, IRS practice and court rulings show that sales representatives who play a principal role in negotiating contracts, pricing or customer relationships may create a taxable presence even if contracts are formally concluded outside the United States (link).

U.S. analysis focuses heavily on functional substance: who influences the deal, who manages customer relationships and where economically significant decisions are made.

State tax nexus and economic presence cases

A distinctive feature of the U.S. system is that state tax exposure may arise even where no federal permanent establishment exists.

In the U.S. Supreme Court case South Dakota v. Wayfair (2018), the Court confirmed that physical presence is not required for state tax nexus, allowing states to impose tax obligations based on economic activity alone (link).

Although Wayfair concerned sales tax, many states have applied similar economic nexus concepts to corporate income and franchise taxes. As a result, foreign companies may face state-level tax obligations even without employees or offices in the United States (link).

This creates a layered risk profile in which federal treaty protection does not necessarily shield a business from state tax exposure.

Where scrutiny typically increases in the United States

Scrutiny typically increases where foreign companies employ U.S.-based staff on a permanent basis, where sales personnel actively negotiate or manage customer relationships, where home offices function as operational hubs, or where sales volumes trigger state economic nexus thresholds.

Authorities place strong emphasis on economic reality and functional substance, often with limited tolerance for purely formal arguments.

What happens if tax presence is assumed

If tax presence is established at the federal level, the United States may tax profits effectively connected with a U.S. trade or business, requiring detailed profit attribution and documentation. At the state level, additional filing, apportionment and tax payment obligations may arise.

Retroactive assessments are common, and penalties and interest can be significant where filings were omitted based on an incorrect assumption of no U.S. presence.

When incorporation becomes the cleaner option

In the United States, incorporation or formal registration often becomes the cleaner option once employees are permanently based in the U.S., when sales or customer management functions are performed locally, when multiple states are involved, or when compliance complexity outweighs the benefits of operating remotely.

At that stage, a U.S. subsidiary or branch typically provides greater certainty, clearer compliance obligations and reduced exposure to unexpected federal and state tax disputes. In many cases, this is the point at which incorporation becomes the more robust and predictable solution.