Permanent establishment

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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.

Fixed place of business[edit]

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:

  • Fixed refers to a link between the place of business and a specific geographic point, as well as a degree of permanence with respect to the taxpayer. An "office hotel" may constitute a fixed place for a business for an enterprise that regularly uses different offices within the space. By contrast, where there is no commercial coherence, the fact that activities may be conducted within a limited geographic area should not result in that area being considered a fixed place of business.[4]
  • A place of business. This refers to some facilities used by an enterprise for carrying out its business. The premises must be at the disposal of the enterprise. The mere presence of the enterprise at that place does not necessarily mean that it is a place of business of the enterprise. The facilities need not be the exclusive location, and they need not be used exclusively by that enterprise or for that business. However, the facilities must be those of the taxpayer, not another unrelated person. Thus, regular use of a customer's premises does not generally constitute a place of business.[5]
  • Business of the enterprise must be carried on wholly or partly at the fixed place.[6]

The requirements of what constitutes a 'permanent establishment' within the scope of a particular treaty depend on what interpretation a particular country places on that term, in context of the text of that treaty. As per Article 3 of the Vienna Convention, no one is entitled to claim rights under a particular treaty unless otherwise authorized by the contracting state. Therefore if a particular contracting state places a different meaning on the term 'permanent establishment' than what the taxpayer seeks to place, the taxpayer would be left with virtually no remedy within that state, other than to seek a mutual agreement to that dispute with the other contracting state to that treaty.

Specifically included places[edit]

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

Specifically excluded places[edit]

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:

  • Ancillary or preparatory activities
  • The use of a storage facility solely for delivery of goods to customers
  • The maintenance of a stock of goods owned by the enterprise solely for purposes of processing by another enterprise (sometimes referred to as toll processing)
  • Purchasing or information gathering activities

Other specific provisions[edit]

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]


  1. ^ E.g., Germany taxes non-German companies only on income from a PE.[citation needed]
  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).