If a permanent has 5 counters but can only have 3, what happens?

When a permanent has more counters on it than it is allowed, state-based actions come into play to resolve this situation. Since the permanent has 5 counters but can only have a maximum of 3, the rules specify that all but the maximum allowed number of counters must be removed.

In this case, since the maximum is 3, 2 counters will be removed, resulting in the permanent having the appropriate number of counters. State-based actions are checks that occur before players receive priority, ensuring that permanents adhere to their defined limits. Therefore, the correct outcome is that all but 3 counters are removed from the permanent.

This aligns with the rules governing state-based actions which dictate how game state inconsistencies are handled, specifically in maintaining the balance of the game by adhering to the limits set on permanents and their counters.