Permanent Establishment (PE)

March 2022

Multinational enterprises doing business in foreign countries are typically subject to the domestic tax laws of the countries where they are engaged in business activities. Those laws may, however, be modified by bilateral tax treaties. The permanent establishment concept, which can be found in such treaties and also in the domestic law of many countries, creates a minimum threshold below which the source country does not attempt to tax a foreign enterprise’s business income. That threshold is set in terms of a minimum physical connection to the jurisdiction. There are normally two means by which an enterprise may cross that threshold and thereby come to have a permanent establishment in a country: by maintaining a fixed place of business in that country, or by means of a dependent agent.

How is a permanent establishment defined?

Bilateral tax treaties normally define a PE based on whether the enterprise has a “fixed place of business” within the target country, as defined by the specific treaty language, or whether the enterprise operates through a dependent agent. The terms of such treaties normally reflect the OECD’s model of standard treaty language, but specific treaties should always be examined for differences or exceptions.

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What are examples of a “fixed place of business?”

Under the OECD model, the term “permanent establishment” includes, but is not limited to:

  • Place of management
  • Branch or office
  • Factory
  • Workshop
  • A mine, oil, or gas well, quarry, or any other place where natural resources are extracted

There are exceptions, however, to these general location types that do not constitute a permanent establishment for treaty purposes. These include the following:

  • Use of a facility solely for the storage, display, or delivery of goods or merchandise owned by the enterprise
  • Maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purposes of storage, display, or delivery
  • Maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise
  • Maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise (or collecting information) for the enterprise
  • Maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity
  • Maintenance of a fixed place of business solely for any combination of the activities listed above

These exceptions apply only if the relevant activity or, in the case of the last exception, the overall activity is preparatory or auxiliary in character.

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Subscriber-Only Resource: Permanent Establishment by Country

Review and export a chart detailing a variety of permanent establishment-related definitions, treaties, and country-by-country laws.

How is a resident of a contracting state taxed if it has a permanent establishment in the other contracting state?

Under most income tax treaties, a resident of a contracting state with a PE in the other contracting state is subject to tax on its trading profits under the source country’s normal income tax rules. This usually means taxation on a net basis measured by the gross income attributable to the PE, reduced by expenses attributable to the PE. The enterprise is potentially also subject to tax on any other income earned in the other contracting state that is not attributable to the PE, in accordance with the applicable provisions of the treaty and the source country’s domestic tax law. For example, investment income not attributable to the PE will most likely be taxed on a gross basis.


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How is a permanent establishment triggered by means of a dependent agent?

Even without a fixed place of business in a treaty country, an enterprise may have a permanent establishment in a treaty country to the extent that an agent in that country acts on its behalf. Under the OECD model, an agent so acting in one country may be considered a permanent establishment of an enterprise of another country if:

  • The agent habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without the enterprise modifying them materially, and
  • those contracts are
    • in the enterprise’s name, or
    • for the transfer of ownership of, or the grant of a right to use, property that the enterprise owns or has the right to use, or
    • for the provision of services by the enterprise

Under model treaty language, an agent is not regarded as a permanent establishment if the following conditions are satisfied:

  • the agent carries on business as an independent agent; and
  • the agent acts for the enterprise in the ordinary course of that business

An agent is not considered to be independent if it acts exclusively, or almost exclusively, on behalf of one or more enterprises to which it is closely related.

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This tool enables practitioners to compare provisions of bilateral tax treaties (including permanent establishment provisions) with the same provisions in other bilateral treaties or in the OECD, US and UN model treaties



Treaty Primer – Chapter II: “How Modern Income Tax Treaties are Designed and Structured: B.5 – Permanent Establishment”

The Treaty Primer is designed to help tax practitioners understand the basics of international income tax treaties and how to apply them to a tax problem. Chapter II.B.5 provides a wide-ranging discussion of the permanent establishment concept and its practical implications

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