Permanent Establishment (PE)

Last Updated August 23, 2022

Multinational corporations doing business in foreign countries are typically subject to the domestic tax laws of the countries where they are engaged in business activities. The permanent establishment concept 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 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 corporation has a “fixed place of business” within the target country, as defined by the specific treaty language, and whether the corporation operates through a dependent agent that habitually exercises the authority to conclude contracts on its behalf in the target country. 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?”

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. De minimis exceptions from permanent establishment include:

  • Use of a facility solely for the storage, display, or delivery of goods or merchandise owned by the corporation
  • 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 preparatory or auxiliary activity
  • Maintenance of a fixed place of business solely for any combination of the activities listed above

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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 under the source country’s normal income tax rules, which usually means taxation on a net basis measured by the gross income attributable to the PE, reduced by expenses attributable to the PE. The resident 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 conducts activities on behalf of the enterprise. An agent in one country may be considered a permanent establishment of an enterprise of another country if:

  • The agent is a dependent agent
  • The agent has and continues to habitually exercise an authority to conclude contracts in the agent’s country that are binding to the enterprise.

Under model treaty language, to avoid being a dependent agent there are two conditions that must be satisfied:

  • The agent must be both legally and economically independent of the enterprise
  • The agent must be acting in the ordinary course of its business in carrying out activities on behalf of the enterprise

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