CONCEPT OF PERMANENT ESTABLISHMENT FOR

INTERNATIONAL TAXATION

Submitted By ANANT JAIN B.Com, M.I.B, C.S.

PERMANENT ESTABLISHMENT (PE) & INTERNATIONAL TAXATION

History and Origin

PE as a concept originated in Prussia in 1845 in the Industrial Code

A PE is generally represented by a fixed place of business viz. branch, office, factory, warehouse etc but also includes a notional base.

The primary use of the PE concept is to determine the right of a state to tax

“International taxation should be based on either political, residential or economic allegiance between the taxpayer and the taxing state.”

TYPES OF PETypes of PE

Fixed place PE Agency PE Installation PE Service PE

An office is afixed place

introductory and auxiliary activities

Income generating

activities

PENO PE

Dependent Agent

Independent Agent

PE (if certain conditions are satisfied)

NO PE

Building site, Construction, Installation or assembly project

PE if lasts greater than 6/12 months

Service by employee or other personnel

PE if services last beyond specified time

FIXED PLACE PE

There must be a fixed place of business The fixed place of business must be located in a certain territorial

area The taxpayer must have a certain right of use [over] the fixed

place of business The activities performed through the fixed place of business must

be of a business character (business activity test) Example- Fishing boat operated within the territorial waters,

Restaurants and shops on-board ships in international traffic,

Home offices, Partner’s premises – a PE for Partnership?

AGENCY PE Origin : The first modern DTA between Prussia and

Austria/Hungary, 1899 Under Indian contract law, agency can be created in the

following ways: Actual express or implied authority Ratification Ostensible authority Necessity

Only dependent agent constitutes a PE who- Acts on behalf of enterprise Has authority to conclude contracts Has no authority but habitually maintains stock of goods and

regularly delivers goods for the enterprise No PE if agent acts in ordinary course of business

INSTALLATION PE Building site or construction or installation project including the

construction of buildings, bridges or canals, excavating and dredging and the laying of pipelines

Installation project means putting together or re-grouping of pre-fabricated elements such as the erection of steel scaffolding or units of production

Final assembling of moveable objects (eg. airplanes) also covered by the above term

India does not agree with the words “the 12 month test applies to each individual site or project”. It considers that a series of consecutive short term sites or projects operated by a contractor would give rise to the existence of a PE in the country concerned

SERVICE PE

Article 5(2)/(3) of the DTAA- furnishing of services by a non resident India through employees or other personnel may result in creation of ‘Service PE’, provided the duration of such services exceed the specified period

Service may be rendered to an associated enterprise of the service provider or a third party service recipient

The permanence element of PE is replaced by the test of minimum length of time in the case of Service PE as in case of installation PE

CHALLENGES TO PE

Challenges to Fixed Place PE Website by itself creates a PE for a foreign enterprise? Location of server to be considered? Can access in India to a website hosted outside India create

a PE ? Problem area especially for ecommerce portals

Challenges to Agency PE Dependent agent – Separate for each function ? Attendance or participation in negotiations - sufficient to

create PE ?

CHALLENGES TO PE Challenges to Installation PE

Whether series of short term unrelated contracts covered? Whether Subcontractor days should be counted towards

main contractor days?

Challenges to Service PE The period of six months within a twelve month period :

Month as a calendar month? Month as a period of thirty days? How should the word ‘month’ be interpreted for twelve

month calculation? Should the services be rendered for a continuous period of

six months?

Thank “U”