Permanent establishment

A permanent establishment (PE) is a fixed place of business which generally gives rise to income or value added tax liability in a particular jurisdiction. The term is defined in many income tax treaties and most European Union Value Added Tax systems. The tax systems in some civil law countries impose income and value added taxes only where an enterprise maintains a PE in the country.[1] Definitions of PE under tax law or tax treaty may contain specific inclusions or exclusions.

Contents

Fixed Place of Business

The starting point for determination if a permanent establishment exists is generally a fixed place of business. The definition of permanent establishment in the OECD Model Income Tax Treaty[2] is followed in most income tax treaties.[3]

The commentary indicates that a fixed place of business has three components:

Specifically included Places

The following are generally considered, prima facie, as constituting permanent establishments:[7]

Specifically excluded Places

Many treaties explicitly exclude from the definition of PE places where certain activities are conducted.[8] Generally, these exclusions do not apply if non-excluded activities are conducted at the fixed place of business. Among the excluded activities are:

Other specific provisions

Many treaties provide specific rules with respect to construction sites. Under those treaties, a building site or construction or installation project constitutes a PE only if it lasts more than a specified length of time. The amount of time varies by treaty.[9]

In addition, the activities of a dependent agent[10] may give rise to a PE for the principal. [11] Dependent agents may include employees or others under the control of the principal. A company is generally not considered an agent solely by reason of ownership of the agent company by the principal.[12] However, activities of an independent agent generally are not attributed to the principal.[13]

Some treaties deem a PE to exist for an enterprise of one country performing services in the other country for more than a specified length of time[14] or for a related enterprise.[15]

References

  1. ^ E.g., Germany taxes non-German companies only on income from a PE.
  2. ^ OECD Model Convention on Income and on Capital Article 5 (OECD Model) and commentary thereon (Commentary).
  3. ^ See, e.g., the U.S./UK treaty Article 5, which is virtually identical to the OECD Model Article 5. The Nigeria/South Africa treaty Article 5, is nearly identical to the OECD Model Article 5, with the addition of a provision clarifying that a fixed place of business used as a sales outlet is a PE, notwithstanding exclusions elsewhere in the article.
  4. ^ Commentary paragraphs 5 and 6.
  5. ^ Commentary paragraph 4.
  6. ^ Commentary paragraph 7.
  7. ^ OECD Model paragraph 2 and Commentary thereon.
  8. ^ OECD Model paragraph 4, and commentary thereon.
  9. ^ For example, the Canada/Belgium treaty sets this limit as 12 months, as does the OECD Model. By contrast, the US/India treaty treats such a site, project or activities continuing for more than 120 days in any twelve month period as a PE.
  10. ^ See Agency (law) for a discussion of the essential characteristics of agent and principal.
  11. ^ OECD Model paragraph 5 and paragraphs 31-31 of the Commentary.
  12. ^ OECD Model paragraph 7 and Commentary paragraphs 40, 41.
  13. ^ OECD Model paragraph 6 and Commentary paragraphs 36-39.
  14. ^ See, e.g., the United Nations Model Tax Convention Article 5 paragraph 3(b).
  15. ^ See, e.g., the US/India treaty, supra., Article 5 paragraph 2(l).