The concept of permanent establishment (PE) emerged from a principle that an entity must demonstrate or possess some degree of permanence in a state for that state to exercise its taxing rights. The concept was originally confined to the traditional ‘bricks and mortar’ model of carrying out business, commonly referred to as ‘fixed place PE’. As business evolved, limiting taxing rights to fixed PEs would have prevented the source jurisdiction from taxing other forms of operations, which also result in some level of permanence. Thus, the principles of agency PE, construction PE, and service PE emerged.
Background to the Hyatt International case
With the thriving growth of cross-border businesses and the digital economy, the yardstick to measure permanence is expected to shift to economic or digital presence as opposed to mere physical presence through an office, a human, or a site. As one wonders how testing and interesting the future could be with the emergence of novel business models propelling tax changes, a recent decision of the Indian Supreme Court, Hyatt International, raises questions about the existing position regarding fixed PE.
In 2017, a landmark decision of the Indian Supreme Court in the case of Formula One World Championship Limited (2017) looked at the concept of permanence through a different lens. It held that the concept of permanence must be juxtaposed to the business being carried out. Therefore, the existence of control over a racetrack in India, even for a few days, would meet the test of disposal, as the underlying business in India – that is, the car race – was conducted only for those limited number of days. The decision was a defining moment in the evolution of international taxation principles.
The ruling in Hyatt International, on July 24 2025, has once again left businesses, tax professionals, and legal enthusiasts grappling for answers. Where, and how, does one draw the line between a taxable presence and a non-taxable one?
The facts surrounding the decision involved a Dubai-based entity, Hyatt International, providing hotel advisory services to Asian Hotels in India under a ‘strategic oversight services agreement’. The question before the Supreme Court was whether the activities of Hyatt International resulted in a fixed PE in India.
The Indian Supreme Court’s findings
The court concluded that the involvement of Hyatt International in the affairs of Asian Hotels was not confined to rendering advisory services but also extended to exercising control over strategic, operational, and financial affairs. The following activities carried out by Hyatt International for Asian Hotels played a critical role in reaching this conclusion:
The appointment of key personnel;
The framing of HR and procurement policies; and
Formulating policies for pricing, marketing, and branding.
The above rights, in the eyes of the Supreme Court, render Hyatt International as not merely donning the hat of a consultant but playing an active role in the core operation of the hotels. The fact that the agreement between the entities spans 20 years also contributed to the satisfaction of tests of stability, productivity, and dependence. Furthermore, Hyatt International was entitled to “strategic fees” calculated as a percentage of room revenue and other revenues derived from the hotel’s operations, as well as cumulative gross operating profit, which reflected an active commercial involvement.
Interestingly, the apex court also observed that continuous and coordinated engagement, as evident from regular visits made by the employees of Hyatt International, also satisfied the test of PE, notwithstanding that no individual employee exceeds the prescribed threshold period of stay in the tax treaty.
The decision of the court certainly entails far-reaching consequences. The mere absence of a physical space at the disposal and control of an enterprise, or the mere absence of an employee or agent representing an enterprise, cannot lead to a conclusion that there is no PE. What is essential to satisfy the disposal test is the existence of a functional control over the core business activities carried out in the premises. Even temporary or shared use of space may be sufficient, while giving primacy to the substance over form of the arrangement.
It is now essential for multinational enterprises to assess the impact of this ruling on various arrangements – such as global capability centres, warehousing, contract manufacturing, or outsourced R&D – where, despite no form of physical presence, functional control exercised by the non-resident by dictating the terms of operation can potentially trigger the invocation of a PE clause. Even subsidiaries with distinct businesses may be construed as PEs on account of the degree of management control exercised by a non-resident parent. These are some of the questions that need to be answered by critically examining the surrounding facts and circumstances.
Final thoughts on the decision
To conclude, the recent ruling opens the doors to debates on how fixed-place PEs have traditionally been viewed, exposing business arrangements to PE risk even without any tangible presence in the source country. As international jurisprudence evolves, one can be sure of only one thing: that certainty in tax is indeed a myth.
