Does a Remote Employee in Pakistan Create a Permanent Establishment?
A person working from Lahore for a company in London or Dubai is not, by itself, a taxable presence. What the person does, and in whose name, decides it.
The domestic test
Section 2(41) of the Income Tax Ordinance 2001 defines a permanent establishment to include a fixed place of business, a building site or project lasting more than 90 days, the furnishing of services through personnel for more than 90 days in a twelve-month period, and a dependent agent who habitually exercises authority to conclude contracts on the non-resident's behalf. Pakistan's treaties with the UK, the US, Canada, Saudi Arabia, the UAE and Qatar follow the OECD/UN pattern with their own thresholds, and a treaty, where it applies, narrows the domestic definition.
Applying it to a remote employee
Fixed place. An employee's home is generally not a fixed place of business of the employer unless the employer requires its use and controls it. A desk the foreign company rents in Lahore in its own name is closer to one.
Service PE. The 90-day services limb bites where the non-resident furnishes services in Pakistan to a Pakistani customer. A back-office employee serving the foreign company's own clients abroad is ordinarily outside it, but the position should be documented.
Dependent agent. This is the live risk. A sales lead in Pakistan who negotiates and concludes contracts with Pakistani customers in the foreign company's name is a dependent-agent PE. The same person who only generates leads and passes them abroad for signature generally is not.
Why the Employer of Record structure helps, and where it does not
Under an EOR the legal employer is an independent Pakistani company carrying out its own business of employment and payroll for a fee. The foreign client has no premises, no entity and no employees of its own in Pakistan. That removes the fixed-place and, in most cases, the service-PE limbs. It does not remove the dependent-agent limb: if the client lets the employee sign deals in Pakistan, the structure will not save it. The service agreement should therefore prohibit the employee from contracting in the client's name, and the job description should match.
Practical checklist
- Job description describes back-office, delivery or support work for the foreign company's own operations; no authority to bind.
- No Pakistani customers invoiced by the employee; all commercial contracts signed abroad.
- No premises leased in the foreign company's name; equipment supplied by the EOR or expensed through it.
- Service agreement records independence, the fee at arm's length, and the PE prohibition; client indemnifies the EOR if the facts drift.
- Keep the Pakistani tax residency certificate of the EOR and the withholding documents from the client's side in one file for any enquiry.
We advise foreign companies and EOR providers on these structures. See Employer of Record & Employment Law and Tax.