Tax Analysts provides news, analysis, and commentary on tax-related topics, including permanent establishments and the definitions and scope of permanent establishments in bilateral tax treaties and income tax conventions. A permanent establishment is usually a fixed place of business that gives rise to income or value added tax (VAT) liability in a jurisdiction.
Article 5 of the OECD Model Tax Treaty, also called the OECD Model Tax Convention on Income and Capital, defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Prima facie permanent establishments include a place of management, a branch, an office, a factory, a workshop, and a mine, oil or gas well, quarry or other place of natural resource extraction. The UN Model tax treaty, or UN Model Double Taxation Convention has a similar definition of a permanent establishment.
Carrying on business through an independent agent acting in the ordinary course may not constitute a permanent establishment, though a person acting on behalf of an enterprise which habitually exercises authority to conclude contracts in the name of the enterprise often does constitute a permanent establishment.
Action 7 of the OECD’s Base erosion and profit shifting project (BEPS) proposes tax treaty measures to prevent the artificial avoidance of permanent establishment status. In Action 1 of BEPS, addressing the tax challenges of the digital economy, the OECD has expressly not recommended a virtual or digital permanent establishment, but has called for the reconsideration of the exceptions to a permanent establishment under the OECD Model tax convention.
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