Permanent Establishment (PE): The Taxable Presence

Definition

The permanent establishment (PE) is the fixed place of business through which an enterprise’s business is wholly or partly carried on — the taxable presence that gives the source jurisdiction the right to tax the enterprise’s profits (the business profits attributable to the PE). It is the treaty’s concept (the OECD Model’s Article 5, the DTA’s PE article) — the line between the no tax (the non-resident without the PE, the business profits not taxable in the source) and the tax (the non-resident with the PE, the profits attributable to the PE taxable in the source). In the transfer pricing context, the PE is the treaty characterization’s pivot — the TDS character (the royalty vs the service fee, the Article 12 vs the Article 7) turns on the PE, and BEPS Action 7 targeted the artificial avoidance of the PE status.

The PE, in the treaty (the OECD Model Article 5):
  The fixed place of business (the place of management, the branch, the
  office, the factory, the workshop, the mine, the store)
    + the business wholly or partly carried on through it
      = the permanent establishment (the taxable presence)
        → the source jurisdiction taxes the profits attributable to the PE
          (the business profits, the DTA’s Article 7)

  The dependent agent PE (the person acting on behalf of the enterprise,
  the habitual conclusion of the contracts, the authority) — the agent’s
  acts create the PE
  The service PE (the DTA-specific — the service provision through a
  person / a place for the specified duration, the 6-month / 12-month
  threshold) — the service’s duration creates the PE

The element	The content
The fixed place	The place of management, the branch, the office, the factory, the workshop, the mine, the oil/gas well, the store (the place, the physical or the digital — the server, the platform, the Pillar One significant digital presence)
The carrying on	The business wholly or partly carried on through the place (the activity, the enterprise’s business, not the preparatory / auxiliary)
The preparatory / auxiliary exclusion	The storage, the display, the purchase, the collection of information (the preparatory / auxiliary — the place not creating the PE, the treaty’s exclusion) — the limited-risk position
The dependent agent PE	The person (not independent) acting on behalf of the enterprise, the habitual conclusion of the contracts (the authority, the habitual) — the agent’s acts creating the PE
The service PE	The DTA-specific (the service provision through a person / a place for the specified duration — the 6-month / 12-month threshold) — the service’s duration creating the PE

The working read (the TDS on TP payments and the OECD guidelines overview): the PE is the treaty characterization’s pivot — the service fee (the Article 7 business profits) is not taxable in the source where no PE (the service provider without the PE, the business profits not sourced) — but is taxable where the service creates the PE (the service PE, the duration, the attributable profits). The royalty (the Article 12) is taxable in the source regardless of the PE (the royalty’s source, the use of the intangible) — the PE is the service fee’s pivot, not the royalty’s. The BEPS Action 7 (the artificial avoidance of the PE status — the dependent agent PE, the limited-risk distribution PE) is the treaty update (the MLI) on the PE’s definition.

Example

The US service provider (the non-resident) provides the technical services to the Indian company (the resident) — the services performed in India through the provider’s team (the people, the location, the duration). The PE question: does the service create the service PE (the DTA’s service PE article — the service provision through a person / a place for the specified duration, the 6-month threshold)? Where the service is performed in India for more than 6 months (the duration, the threshold crossed) — the service PE is created, and the business profits attributable to the PE (the service profits) are taxable in India (the Article 7, the PE attributable). The TDS consequence: the service fee (the Article 7 business profits) is not the royalty (the Article 12 is not the character) — but the PE changes the taxability (the business profits attributable to the PE, the Indian tax on the service profits). The TP interaction: the service’s pricing (the arm’s length fee, the TNMM on the service) is the transfer pricing question; the PE is the treaty question (the taxable presence, the attributable profits) — the two run in parallel, the TDS guide has the characterization, the OECD guidelines overview has the PE’s framework.

See also

• TDS on Transfer Pricing Payments (the PE’s TDS consequence)
• BEPS (the Action 7 PE avoidance)
• The OECD Guidelines Overview

FAQ

What is the difference between the PE and the branch? The branch is one type of PE (the fixed place of business — the branch, the office, the factory, the store). The PE is the concept (the taxable presence — the fixed place, the dependent agent, the service PE) — the branch is the place PE, the dependent agent is the agent PE, the service PE is the duration PE. The PE is the treaty’s concept (the Article 5, the taxable presence); the branch is the physical instance (the place, the fixed). The OECD guidelines overview has the PE’s framework (the place, the agent, the service, the preparatory/auxiliary exclusion).

How does the PE interact with the transfer pricing? The PE is the treaty characterization’s pivot (the taxability — the business profits attributable to the PE, the source tax) — the transfer pricing is the pricing (the arm’s length fee, the TNMM, the method). The two run in parallel: the TP prices the service (the arm’s length fee, the comparables, the range); the PE determines the taxability (the service PE, the duration, the attributable profits). The TDS guide has the characterization (the royalty vs the service fee, the PE’s role in the service fee’s taxability); the OECD guidelines overview has the PE’s framework. The interaction (the PE’s attributable profits, the TP’s arm’s length pricing) is the treaty / TP interface — the file carries both (the PE analysis, the TP documentation).

What is the BEPS Action 7 change to the PE? The Action 7 (the artificial avoidance of the PE status) targets the structures that avoid the PE (the dependent agent PE — the person who appears not to conclude the contracts but does; the limited-risk distribution PE — the warehouse / the storage that is not the preparatory/auxiliary). The MLI (the multilateral convention, the MAP / DTA context) implements the Action 7 treaty updates (the dependent agent PE, the limited-risk distribution PE, the anti-fragmentation rule). The BEPS guide has the Action 7’s content; the OECD guidelines overview has the PE’s framework (the 2015 Guidelines’ PE chapter, the Action 7 changes).