Permanent Establishment Risk: When One Remote Employee Creates a US or UK Tax Presence

Yes, a single remote employee can create a permanent establishment for a US or UK company in the other country. Under Article 5 of the US/UK tax treaty, it happens if the employee's home becomes a settled place through which your business is carried on, or if the employee habitually concludes contracts that bind the company. Where a permanent establishment exists, the other country can tax the profits attributable to it.

Remote hiring has made this a live question for small and mid-sized companies, not just multinationals. A Delaware software company hires its first UK salesperson; a London consultancy lets a senior manager move to Boston and keep working. Neither company opened an office. Both may now have a taxable presence abroad. This guide explains the treaty tests, how HMRC reads them, the 2026 change to UK law, and the separate payroll and social security duties that sit alongside.

What is a permanent establishment under the US/UK treaty?

A permanent establishment is the treaty's threshold for one country to tax another country's business profits. Article 7(1) of the 2001 US/UK treaty says the business profits of an enterprise of one country "shall be taxable only in that State" unless it carries on business in the other country through a permanent establishment there (US/UK treaty text, US Treasury). If it does, the other country may tax only the profits attributable to that permanent establishment.

Article 5 of the treaty gives two main routes to a permanent establishment:

• Fixed place of business (Article 5(1)). A permanent establishment is "a fixed place of business through which the business of an enterprise is wholly or partly carried on". Article 5(2) lists examples including a place of management, a branch and an office.
• Dependent agent (Article 5(5)). A company is treated as having a permanent establishment where a person, other than an independent agent, "habitually exercises" in that country "an authority to conclude contracts that are binding on the enterprise".

Article 5(4) then carves out activity that is only preparatory or auxiliary, such as a place kept solely for storage, purchasing or collecting information. Article 5(6) protects business done through a broker or other agent of independent status acting in the ordinary course of its own business. Article 5(7) confirms that owning or being owned by a company in the other country does not, by itself, create a permanent establishment.

How one remote employee creates a permanent establishment in the US or UK

A remote employee can trigger either limb of Article 5. Which one matters depends on the employee's role and how the arrangement is set up.

The home office as a fixed place of business

An employee's home is not the company's property, but that does not settle the question. HMRC's International Manual at INTM264430 says a place of business is fixed if it is established at a distinct place with a degree of permanence. On timing, HMRC notes that a place maintained for less than six months has generally not been treated as a permanent establishment, with an exception for recurring activities, where the periods of use are looked at together.

HMRC's worked examples at INTM264435 are the closest thing to official guidance on remote work. A one-off working holiday of a few weeks does not meet the permanence test. A fixed three-month stint in the UK every year under a permanent contract does meet it, because the presence is regular rather than sporadic. Rotating staff through the UK does not break continuity. And a six-month arrangement working partly from a London home is, in HMRC's words, not automatically exempt: the facts have to be examined.

So the risk is highest for a UK or US home office that is open-ended, used as the employee's main workplace, and where the company expects or needs the employee to be in that country. It is lowest for occasional or short visits and for an employee whose location is purely a personal choice the company did not ask for and gains nothing from.

The employee as a dependent agent

The agent test does not care where the employee sits. Under Article 5(5) of the treaty, the question is whether the employee habitually exercises authority to conclude contracts that bind the company. A salesperson who negotiates terms and signs customer agreements in the UK for a US company is the classic case. A permanent establishment arising this way covers the activities the person undertakes for the company, unless those activities are limited to the preparatory or auxiliary list in Article 5(4).

Roles that rarely trigger the agent test are those that never touch contracts: engineers, designers, back-office finance staff and researchers. Roles that frequently do are sales, business development with signing authority, and senior managers who run a country.

Did UK law on permanent establishments change in 2026?

Yes, for UK domestic law. Section 1141 of the Corporation Tax Act 2010 defines a UK permanent establishment. Finance Act 2026 substituted a new section 1141(1)(b) for chargeable periods beginning on or after 1 January 2026 (CTA 2010 s1141, legislation.gov.uk). The dependent agent limb now covers a person acting for the company in the UK who "habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts" that the company routinely concludes without material modification.

That wording is wider than the treaty's. Article 5(5) of the US/UK treaty still refers to a person who habitually exercises authority to conclude binding contracts. For a US-resident company entitled to treaty benefits, the treaty test is the one that limits UK taxing rights, so a salesperson who sets up every deal but leaves the signing to head office may fall within the new UK domestic rule yet outside the treaty. Companies from countries without a treaty with the UK, or that are not entitled to treaty benefits, face the domestic rule directly. Claiming the treaty position still means having the facts documented.

Decision table: permanent establishment risk by remote employee role

The table below summarises how the two treaty tests usually apply to common remote roles. It is a starting point for a review, not a substitute for one: the same job title can carry very different risk depending on authority and permanence.

Remote employee's role and set-up	Fixed place test (Art. 5(1))	Agent test (Art. 5(5))	Overall risk
Engineer working from home in the other country by personal choice, no client contact	Possible if open-ended; depends on facts	Low: no contract authority	Low to moderate
Salesperson who negotiates and signs customer contracts	Possible	High	High
Salesperson who finds leads; head office negotiates and signs	Possible	Lower under the treaty; wider UK domestic test since 2026	Moderate
Country manager running local operations from home	High: may be a place of management	Often high	High
Market researcher collecting information only	Excluded if solely preparatory or auxiliary (Art. 5(4)(d))	Low	Low
Staff member on a short working holiday abroad	Generally not met: no permanence	Low unless they sign contracts	Low

What a permanent establishment costs: tax and filing consequences

If a permanent establishment exists, the host country can tax the profits attributable to it. Article 7(2) of the treaty attributes to the permanent establishment the profits it might be expected to make as a distinct and separate enterprise dealing wholly independently with the rest of the company, based on the assets used, risks assumed and activities performed there.

A US company with a UK permanent establishment pays UK Corporation Tax on those attributed profits. GOV.UK currently lists a main rate of 25% and a small profits rate of 19% for profits of £50,000 or less, with marginal relief in between (Corporation Tax rates, GOV.UK). The company has to register with HMRC, keep accounts for the UK permanent establishment and file returns. The US generally allows a foreign tax credit for the UK tax, subject to the usual limits.

A UK company with a US permanent establishment pays US federal corporate income tax on the profits attributable to it and files Form 1120-F. Even where the company concludes it has no US permanent establishment, the IRS instructions say a foreign corporation should file a protective Form 1120-F if it initially determines it has no US tax liability under a treaty, and attach a completed Form 8833 to disclose the treaty position (Instructions for Form 1120-F, IRS). The same instructions warn that a foreign corporation that does not file loses the right to deductions and credits against effectively connected income. Our guide to Form 8833 and treaty-based return positions explains the disclosure itself.

US states sit outside the treaty. Article 2(3)(a) limits the treaty's US coverage to the federal income taxes imposed by the Internal Revenue Code. A UK company with no US permanent establishment can still have state income or franchise tax filings in the state where its employee lives, under that state's own nexus rules.

Payroll and social security: separate from permanent establishment

Permanent establishment is a corporate tax test. Payroll and social security follow their own rules, and companies regularly get one right and the other wrong.

UK payroll (PAYE) for an overseas employer

HMRC's PAYE Manual at PAYE81610 says a branch, agency or UK representative office establishes a tax presence for PAYE, but HMRC does not regard an overseas employer as having a tax presence simply because it has employees in the UK. An overseas employer with no UK presence can still choose to operate PAYE voluntarily. Where it does not, and a UK entity receives the employee's work, PAYE81511 explains that section 689 of ITEPA 2003 can make that UK entity responsible for PAYE. Where nobody operates PAYE, the employee may have to pay their own tax and National Insurance under a direct payment arrangement with HMRC (PAYE20100).

US payroll for a UK employer

The IRS says individuals employed in the United States by a foreign employer are generally subject to Social Security and Medicare tax withholding by that employer, unless a totalization agreement exempts them (Persons employed by a foreign employer, IRS). The wages are US-source because the work is done in the US, so the employee owes US income tax on them, and the UK employer needs to set up US payroll or use a provider that can.

Which country's social security applies?

The US/UK Social Security Agreement (a "totalization agreement" in US terms) decides which system covers the worker, so they do not pay into both. A worker sent temporarily by their employer from one country to the other, on an assignment expected to last five years or less, generally stays in the home system and needs a certificate of coverage to prove it (US-UK agreement, SSA). A person hired locally to live and work in the other country is not a detached worker and is normally covered where they work. Our guide to National Insurance for Americans in the UK covers the UK side in more detail.

What do companies get wrong about remote employees and permanent establishment?

Most problems come from treating the question as settled by a single fact. These are the most common mistakes:

• "We have no office, so we have no permanent establishment." The treaty's agent test needs no premises at all, and HMRC says a home can be a fixed place of business.
• "The employee signs nothing, so we are safe." That helps under the treaty, but since 1 January 2026 the UK domestic test also covers a person who habitually plays the principal role leading to contracts. A non-treaty-protected company faces that wider test.
• "Payroll is set up, so tax is handled." Running PAYE or US payroll deals with the employee's tax. It says nothing about whether the company has a permanent establishment.
• "No permanent establishment means no filing." A UK company relying on the treaty in the US may still need a protective Form 1120-F with Form 8833, and state rules apply regardless.
• "An employer of record removes the risk." It moves the employment contract. It does not change what the person does for your business.

Illustrative example: a US software company with no UK presence hires a sales director who lives in Manchester and works from a home office on an open-ended contract. The director negotiates pricing with UK customers and signs order forms on the company's behalf. That pattern points to a dependent agent permanent establishment under Article 5(5) of the US/UK treaty, and the open-ended home office adds fixed place risk. If the company changes the role so that the director generates and qualifies leads while contracts are approved and signed in the US, the treaty agent risk falls, although the new UK domestic test would still need to be considered if treaty benefits were not available. Separately, because the company has no UK branch or office, HMRC would not see it as having a PAYE tax presence merely because of the employee, so the company would need to decide whether to operate PAYE voluntarily or leave the director to pay through a direct payment arrangement.

How to manage permanent establishment risk for a remote employee in the US or UK

A short, documented review before the hire is far cheaper than unwinding a permanent establishment afterwards. Our permanent establishment advice for remote employees in the US and UK follows these steps:

1. Map the role. Write down what the employee will do, who they deal with, and whether they negotiate, approve or sign contracts.
2. Set contract authority deliberately. Put signing and pricing authority in writing, keep it at head office where that reflects reality, and make sure practice matches the paper.
3. Record why the employee is where they are. If the location is the employee's personal choice and the company gains nothing from it, say so in the employment documents.
4. Avoid company-provided premises abroad. Reimbursing a co-working desk or renting space in the employee's name can make the fixed place test easier to meet.
5. Check treaty entitlement. Confirm the company qualifies for US/UK treaty benefits, including the limitation on benefits article, before relying on the narrower treaty agent test.
6. Sort payroll and social security. Decide on PAYE or US payroll, and get a certificate of coverage where the detached worker rule applies.
7. File what is needed. In the US, consider a protective Form 1120-F with Form 8833 and check state nexus. In the UK, register for Corporation Tax promptly if a permanent establishment exists.
8. Review annually. Roles drift. A researcher who becomes a country manager changes the answer.

Founders weighing their first overseas hire should also read our guide to founder tax for US/UK startups, and independent contractors working across borders face a different version of the question, set out in contractor tax for US/UK remote work. Payroll on either side can be handled through our cross-border payroll services.

How US/UK Cross Border Tax can help

US/UK Cross Border Tax is a team of US CPAs and UK tax advisers working as one team, with offices in London, Manchester, New York and San Francisco. We review remote hiring plans against both the treaty and domestic law, document the position, and handle the Corporation Tax, Form 1120-F, payroll and state filings that follow. Read more about how we work with businesses operating across the US and UK, or contact us to discuss a planned or existing remote hire.