What is a permanent establishment?
PE (permanent establishment) in general, under a treaty, a permanent establishment is a fixed place of business through which the business of an enterprise is carried on in whole or in part. A permanent establishment generally includes a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry, or other places of extraction of natural resources and/or possibly in certain cases the construction site.
The basic definition of permanent establishment is supplemented by a rule that deems a non-resident to have a permanent establishment in a country if another person acts in that country as an agent of the non–resident and habitually exercises the authority to conclude contracts in the name of the non-resident. That rule, however, does not apply to independent agents acting in the ordinary course of their business.
Thus, if a person, other than an independent agent, is acting on behalf of an enterprise and has and habitually exercises the authority in a country to conclude contracts in the name of an enterprise of the other country, the enterprise generally will be deemed to have a permanent establishment in the first country in respect of any activities that person undertakes for the enterprise.
Under the OECD model and the U.S., and U.K. model, this rule does not apply where the contracting authority is limited to those activities described above, such as the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise, the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery, the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise, the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise, the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character, the maintenance of a fixed place of business solely for any combination of activities mentioned above, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.
Why is the concept of a permanent establishment important?
Tax treaties typically provide that the business profits of a foreign business or taxpayer are taxable in the host state only to the extent that the enterprise/taxpayer has a permanent establishment in the host state to which the profits are attributable.
The concept of a permanent establishment is, in other words, a basic nexus/threshold rule for determining whether or not a country can generally tax the business profits of a non-resident taxpayer. The permanent establishment concept also acts as a source rule to the extent that, as a general rule, the only business profits of a non-resident that may be taxed by a country are those that are attributable to a permanent establishment. In addition, the permanent establishment concept is used to determine whether the reduced rates of, or exemptions from, tax provided for dividends, interest, and royalties apply or whether those amounts are taxed as business profits.
What about a subsidiary?
It is generally accepted that the existence of a subsidiary company does not, in and of itself, constitute a permanent establishment of its parent company.
However, any space or premises belonging to the subsidiary that is at the disposal of the parent company and that constitutes a fixed place of business through which the parent carries on its own business may constitute a permanent establishment of the parent.
An example is that of an employee of a company who, for a long period of time, is allowed to use an office in the headquarters of another company (e.g., a newly acquired subsidiary) in order to ensure that the latter company complies with its obligations under contracts concluded with the former company. In that case, the employee is carrying on activities related to the business of the former company and the office that is at his disposal at the headquarters of the other company may constitute a permanent establishment of his employer, provided that the office is at his disposal for a sufficiently long period of time so as to constitute a “fixed place of business.
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As an experienced team of tax advisors, tax experts and lawyers who deal with permanent establishment, we can help you in the following matters:
- Comprehensive assistance regarding permanent establishment – identification, moment creation of permanent establishment, registration.
- General advice on setting up companies in other jurisdictions and transferring assets.
- Representation in proceedings before public administration bodies and administrative courts.
- An independent audit of the tax function.