Article 5 OECD MC: Permanent Establishment
PARAGRAPH 1: the definition (and application) of the PE concept
Article 5(1) OECD MC -> defines a PE to mean ‘a fixed place of business through which the
business of an enterprise is wholly or partly carried on’.
1) Essential characteristics of the PE concept of paragraph 1:
According to the definition, these are the following essential conditions for the determination
of the existence of a PE:
1) there must be a place of business;
2) the place of business must be fixed, ie. It must be established at a distinct place with a
certain degree of permanence
3) the business must be carried on through that (fixed) place.
NOT necessary that the fixed place of business must be productive in the sense of producing
profits (ph. 7)
A. Place of business:
The geographical context of a place of business
o a business must be carried on at a “specific geographical point” (para 7)
o the term covers: any premises, facilities or installations used for carrying on the
business of the enterprise whether or not they are used exclusively for that
purpose.
o See ph. 10 for examples (ie. Premises, facilities, installations) + see phs 14-19
for practical scenarios!!
‘At the disposal’
o It is not necessary for an enterprise to own, rent or otherwise have a legal right to use
the place of business (ph. 10) an enterprise can have a place of business where “it
simply has a certain amount of space at its disposal”
o Although an enterprise does not need to have a legal right to use space in order for that
space to be at its disposal, the mere use of space by an enterprise is not sufficient
o GENERAL TEST for whether a place is at the disposal of an enterprise:
o What matters is that the enterprise has ‘certain amount of space at its disposal’
o This “will depend on that enterprise having the effective power to use that
location as well as the extent of the presence of the enterprise at that location
and the activities that it performs there” (para 12) – all facts and circumstances
have to be taken into account see examples ph 12-19
, B. The place of business must be ‘fixed’ (required degree of permanency)
According to the definition, the place of business has to be a “fixed” one
o There must be a link between the place of business and a specific geographical point!!
Geographical and temporal aspects:
both are inherent in the use of the term “permanent”
A. Geographical aspect (the PE must be fixed in a geographical sense)
It is enough that the equipment remains on a particular site. It does not mean that
the equipment constituting the place of business has to be actually fixed to the soil
on which it stands
If business is carried out in a State at different places:
o each place must be tested separately to determine whether it meets the
requirements of the definition of a PE
o The test applied to determine whether activities are conducted at one place or at
multiple places is whether a location constitutes “a coherent whole commercially
and geographically” with regard to the taxpayer’s business (see examples ph 23)
If activities are often moved determine if coherent whole commercially
and geographically (ph 22)
Indeed, a single place of business will generally be considered to
exist where, in light of the nature of the business, a particular
location within which the activities are moved may be identified as
constituting a coherent whole commercially and geographically
with respect to that business.
B. Temporal aspect (the PE must exist for a significant amount of time)
a PE only exist if the place of business has a certain degree of permanency (ie if it is
not of a purely temporary nature) generally 6 months!! Ph. 28
Retrospective (ph. 35) application of the 6-month rule:
a determination as to whether or not there is a PE must be made
retrospectively because of the time threshold
whether or not a fixed place of business is a PE can be determined
only after the place has been used by the taxpayer to carry on
business for at least 6 months.
once that time threshold (and the other requirements) has been
satisfied, the PE is considered to have existed from the outset of
the business activities at the fixed place
Measuring the 6 months period :
A taxpayer’s intentions may cause a place of business that exists for
less than 6 months to be a PE. If the taxpayer intends the business
to be carried on at the fixed place for a long time, that place is
considered to be a PE, even if the business is prematurely
terminated for some reason
The period may extend over several years (to deal with short term
recurrent activities, as explained below) and is not limited to a
period of 12 months or a fiscal year (ph. 29)
Temporary interruptions in the business also do not stop the time
from running (ph. 32 + 44)
When does a PE begin and cease to exist?
Begin of existence -> as soon as the enterprise commences to carry
on its business through a fixed place of business (ph. 44)
PARAGRAPH 1: the definition (and application) of the PE concept
Article 5(1) OECD MC -> defines a PE to mean ‘a fixed place of business through which the
business of an enterprise is wholly or partly carried on’.
1) Essential characteristics of the PE concept of paragraph 1:
According to the definition, these are the following essential conditions for the determination
of the existence of a PE:
1) there must be a place of business;
2) the place of business must be fixed, ie. It must be established at a distinct place with a
certain degree of permanence
3) the business must be carried on through that (fixed) place.
NOT necessary that the fixed place of business must be productive in the sense of producing
profits (ph. 7)
A. Place of business:
The geographical context of a place of business
o a business must be carried on at a “specific geographical point” (para 7)
o the term covers: any premises, facilities or installations used for carrying on the
business of the enterprise whether or not they are used exclusively for that
purpose.
o See ph. 10 for examples (ie. Premises, facilities, installations) + see phs 14-19
for practical scenarios!!
‘At the disposal’
o It is not necessary for an enterprise to own, rent or otherwise have a legal right to use
the place of business (ph. 10) an enterprise can have a place of business where “it
simply has a certain amount of space at its disposal”
o Although an enterprise does not need to have a legal right to use space in order for that
space to be at its disposal, the mere use of space by an enterprise is not sufficient
o GENERAL TEST for whether a place is at the disposal of an enterprise:
o What matters is that the enterprise has ‘certain amount of space at its disposal’
o This “will depend on that enterprise having the effective power to use that
location as well as the extent of the presence of the enterprise at that location
and the activities that it performs there” (para 12) – all facts and circumstances
have to be taken into account see examples ph 12-19
, B. The place of business must be ‘fixed’ (required degree of permanency)
According to the definition, the place of business has to be a “fixed” one
o There must be a link between the place of business and a specific geographical point!!
Geographical and temporal aspects:
both are inherent in the use of the term “permanent”
A. Geographical aspect (the PE must be fixed in a geographical sense)
It is enough that the equipment remains on a particular site. It does not mean that
the equipment constituting the place of business has to be actually fixed to the soil
on which it stands
If business is carried out in a State at different places:
o each place must be tested separately to determine whether it meets the
requirements of the definition of a PE
o The test applied to determine whether activities are conducted at one place or at
multiple places is whether a location constitutes “a coherent whole commercially
and geographically” with regard to the taxpayer’s business (see examples ph 23)
If activities are often moved determine if coherent whole commercially
and geographically (ph 22)
Indeed, a single place of business will generally be considered to
exist where, in light of the nature of the business, a particular
location within which the activities are moved may be identified as
constituting a coherent whole commercially and geographically
with respect to that business.
B. Temporal aspect (the PE must exist for a significant amount of time)
a PE only exist if the place of business has a certain degree of permanency (ie if it is
not of a purely temporary nature) generally 6 months!! Ph. 28
Retrospective (ph. 35) application of the 6-month rule:
a determination as to whether or not there is a PE must be made
retrospectively because of the time threshold
whether or not a fixed place of business is a PE can be determined
only after the place has been used by the taxpayer to carry on
business for at least 6 months.
once that time threshold (and the other requirements) has been
satisfied, the PE is considered to have existed from the outset of
the business activities at the fixed place
Measuring the 6 months period :
A taxpayer’s intentions may cause a place of business that exists for
less than 6 months to be a PE. If the taxpayer intends the business
to be carried on at the fixed place for a long time, that place is
considered to be a PE, even if the business is prematurely
terminated for some reason
The period may extend over several years (to deal with short term
recurrent activities, as explained below) and is not limited to a
period of 12 months or a fiscal year (ph. 29)
Temporary interruptions in the business also do not stop the time
from running (ph. 32 + 44)
When does a PE begin and cease to exist?
Begin of existence -> as soon as the enterprise commences to carry
on its business through a fixed place of business (ph. 44)
