With the significant expansion of trans-boundary economic activity in recent years, the international aspects of a country tax system has become increasingly important. As the transaction is exposing MNCs to double taxation by source states, who claim to have nexus based on the origin of the income, and resident states, who want to tax worldwide income of their residence. Hence, to shun this problem countries limit their tax sovereignty through domestic laws or by signing double tax agreements (DTAs). According to domestic laws and DTAs the right to tax business profit tax is granted to source state, whenever the non-resident undertakes its business by creating permanent establishment (PE), which is one means for doing business in foreign state, through fixed place of business or via dependent agents. The term PE serves as a parameter to distribute the right to tax business profit tax between source and resident states. Domestic tax laws and DTAs, that are usually signed based on the two prominent models, namely; UN and OECD models, define the concept by enumerating the scenarios that may create PE status in the source state. Domestic tax laws of Ethiopia and the DTAs she signs also comprise the definition of PE. However, now a day the definition of PE became subject to various criticisms, Such as; narrowly defined PE is jeopardizing tax base of capital importing (source states), the legal loophole in the definition of PE is exposing countries to tax avoidance schemes of MNCs and administration of the concept of PE is believed to be challenging for developing countries. Hence, this study analyzes the definition of PE under the domestic tax law and the DTAs signed by the country in comparison with the UN model tax convention as this model defines PE in the way that safeguard taxation right of developing countries via broadly defined PE and as it encompass specific anti- avoidance clauses. The study strive to elucidate how the domestic tax law and DTAs signed by the country define the term PE and explore whether this definition preserve the tax interest of the country, whether it leave a room for tax avoidance scheme of MNCs and the administration of taxation of PE by the authority. To accomplish these objectives the researcher employs qualitative legal research method. Thus, legal analysis and information gathered through an in-depth interview with officials in MOF and MOR serve as primary data. The findings of this research reveal that the DTAs define PE narrowly in the way that endanger taxation right of Ethiopia, absence of specific anti avoidance clauses in the definition also makes the country prone to tax avoidance schemes besides administration of PE is challenging for the tax authority due to; limitation of resource, dearth of experts, absence of cooperation amidst government agency in information exchange. Thus, the researcher recommend that MOF should re-negotiate tax treaties that hamper taxation right of the country, MOF and MOR should have strong cooperation and the tax authority should adopt systematic information gathering mechanisms.