The permanent establishment section in the OECD Model Tax Treaty is a remarkably complete section; it anticipates the work-arounds that most attorney’s would consider to avoid PE status. Case in point: the agent rules.
Remember that a permanent establishment is “a fixed place of business through which the business of an enterprise is wholly or partly carried out. In seeing that definition, an attorney would start to think,” what if, instead of a bricks and mortar establishment, we contract with a person?” Well, the treaty has that covered as well.
5. Notwithstanding the provisions of paragraphs 1 and 2, where a person — other than an agent of an independent status to whom paragraph 6 applies — is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.
6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
The above two paragraphs are great examples of good treaty drafting, as they anticipate the intended side-stepping that a lawyer would engage in.
The primary, in country activity that that treaty is looking for is the ability to conclude contracts; in the words of the commentaries:
Persons whose activities may create a permanent establishment for the enterprise are so-called dependent agents i.e. persons, whether or not employees of the enterprise, who are not independent agents falling under paragraph 6. Such persons may be either individuals or companies and need not be residents of, nor have a place of business in, the State in which they act for the enterprise. It would not have been in the interest of international economic relations to provide that the maintenance of any dependent person would lead to a permanent establishment for the enterprise. Such treatment is to be limited to persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a particular extent in business activities in the State concerned. Therefore, paragraph 5 proceeds on the basis that only persons having the authority to conclude contracts can lead to a permanent establishment for the enterprise maintaining them.
In trying to determine the appropriate level of activity within a state to apply PE status, the drafters had to find some type of balance; they concluded that the ability to habitually conclude contracts in the country was a strong enough fact to demonstrate a companies intent to avail themselves of the benefits and burdens of a particular jurisdiction.
I’ll add more detail to this concept in the next post.