Reworking the Tax Framework in a Permanently Established AI Era - Conference/Legal Analysis Overview

Oct 22, 2026

Reworking the Tax Framework in a Permanently Established AI Era analyzes how artificial intelligence challenges traditional cross-border taxation concepts, particularly the threshold of Permanent Establishment (PE). It explains India’s approach through Significant Economic Presence (SEP) and Equalization Levy while noting interpretive gaps for digital nexus under tax treaties. The discussion covers fixed place PE and the role of servers, shared infrastructure “at disposal” tests, and edge computing, then considers whether AI or the humans operating AI could function as dependent agents.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages4

Reading Time10 min

AccessFree to download

Emerging Tax Trends – A Compendium

Fixed Place PE and AI Infrastructure

Can AI Be a “Dependent Agent”?

Reworking the Tax Framework in a Permanently Established AI Era Amit Ganatra, Khaitan & Co Akshara Shukla, Khaitan & Co Artificial Intelligence or AI professions. As enterprises has fundamentally reshaped cross-border operations of businesses and increase the usage of AI-driven tools, algorithms, and virtual agents to cater to overseas markets, traditional dimensions of tax presence are being tested in new ways. Similarly, as AI companies themselves engage in developing, training, and deploying of technology across jurisdictions, they are also faced with the question of tax presence from another vantage point. The ever-evolving means of creating and using technology now requires law and policy makers to regularly revisit the dimensions of cross-border taxation regime. At the heart of cross border taxation law lies the construct of Permanent Establishment (PE) . Generally speaking, PE is a formal threshold which determines when a foreign enterprise has sufficient footing or nexus in a jurisdiction to warrant taxation in that jurisdiction. Traditionally, PE as a concept is rooted in physical presence and human agencies. However, the contours of this concept now need to be tested by AI systems that can generate significant economic value in a country without any meaningful physical or human presence. India occupies a unique position in the discourse surrounding permanent establishments. It has proactively expanded its tax nexus rules through the Significant Economic Presence (SEP) provisions and the erstwhile Equalization Levy, signalling a clear intent to tax digital economy profits. However, the fundamental PE framework under India’s tax treaties still leaves a void in exploring the boundaries of digital nexus, creating significant interpretive challenges when AI is deployed across borders. The Indian tax nexus framework Indian tax law subjects to tax any income which is sourced to India through a “business connection” in India. This broad domestic law concept is replaced by, and also constrained by PE definitions in India’s extensive network of Double Taxation Avoidance Agreements (DTAAs) . The PE concept under India’s DTAAs encompasses several categories, including a fixed place PE (a fixed place of business through which the enterprise carries on its business), an agency PE (a dependent agent who habitually exercises authority to conclude contracts), a service PE (furnishing of services by manpower for a specified duration), and the construction PE. Each of these categories may potentially be linked to the deployment of AI systems in India, though in ways that the treaty drafters could not have anticipated. Emerging Tax Trends –A Compendium Fixed Place PE and AI Infrastructure The OECD Commentary on Article 5 recognizes that a server, being a physical equipment, can constitute a fixed place of business and therefore a PE. Jurisdictionally, even the Indian judiciary continues to ponder on the contribution of an automated equipment in creation of a PE, while deciding on the challenge to AAR ruling in the case of Mastercard Asia Pacific. In this background, if a foreign enterprise’s AI model runs on servers located outside India and Indian users simply access it remotely, the traditional fixed place PE test may be hard to satisfy, since there is no physical infrastructure or presence in India. On the contrary, when a foreign enterprise installs AI models on servers physically located in India, the discussion on fixed place PE gains relevance due to physical nexus. Similarly, when AI is deployed by a foreign enterprise on a shared physical infrastructure which is owned by a third-party Indian entity, the pivotal inquiry becomes whether the foreign enterprise has the server “at its disposal” as per the test laid down by Supreme Court in Formula One World Championship Ltd. vs. CIT. Under prevailing interpretive approaches, a mere right to computing resources on a shared infrastructure, without exclusi

FAQs

Why does AI complicate the traditional Permanent Establishment (PE) framework for cross-border taxation?

Because AI systems can generate economic value in a jurisdiction without meaningful physical or human presence, challenging PE assumptions built around physical presence and human agencies.

How does India’s tax policy attempt to address digital economy profit taxation?

India has expanded tax nexus through Significant Economic Presence (SEP) provisions and the erstwhile Equalization Levy, signaling an intent to tax digital economy profits.

When can servers used for AI potentially create a fixed place PE?

OECD Commentary on Article 5 treats a server as physical equipment that can constitute a fixed place of business. If AI models run on servers physically located in India, fixed place PE discussions become more relevant, including edge computing scenarios.

Oct 22, 2026

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