Vaste Inrichting

Permanent Establishment Analysis

A permanent establishment (PE) is a fixed place of business through which an enterprise carries on its business in another jurisdiction. PE determination is fundamental to international tax — it defines whether a country can tax a non-resident enterprise's business profits under Article 7 of the OECD/UN Model Tax Conventions.

What is a PE?

Article 5 of the OECD Model Tax Convention defines a PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The concept serves as a threshold: without a PE, the source state generally cannot tax the business profits of a non-resident enterprise.

The PE concept has evolved significantly through BEPS Action 7, which broadened the definition to address commissionnaire arrangements, artificial fragmentation of activities, and contract-splitting strategies.

PE Types

Fixed Place of Business (Art. 5(1))

The general rule — a PE exists when there is a fixed place of business (office, factory, workshop, branch) at the disposal of the enterprise, through which it carries on business. Requires geographic and temporal permanence.

Construction PE (Art. 5(3))

A building site or construction/installation project constitutes a PE only if it lasts more than 12 months (OECD Model) or 6 months (UN Model). Duration is measured per project, with anti-splitting rules.

Service PE (Art. 5(3)(b))

Under the UN Model and many bilateral treaties, furnishing of services by an enterprise through employees present in the other state for more than 183 days in any 12-month period creates a PE.

Agency PE (Art. 5(5)-(6))

A person acting on behalf of an enterprise who habitually concludes contracts or plays the principal role leading to contract conclusion — and is not an independent agent — can create a PE for that enterprise.

BEPS Action 7

BEPS Action 7 introduced significant changes to the PE definition, implemented through the Multilateral Instrument (MLI) and reflected in the 2017 OECD Model update.

Anti-Fragmentation Rule (Art. 5(4.1))

Prevents enterprises from fragmenting a cohesive business into several small operations that individually qualify as preparatory or auxiliary. If the combined activities form a complementary function as part of a cohesive business, the exception does not apply.

Preparatory / Auxiliary Activities

The specific activity exemptions in Art. 5(4) (storage, purchasing, information gathering) now require each activity to be genuinely preparatory or auxiliary in character — the automatic exemption based on listed activities is removed.

Key Case Law

Philip Morris (Netherlands, 2002)

Established that a subsidiary can constitute a PE of its parent company if it acts as a dependent agent habitually exercising authority to conclude contracts.

Dell (Norway, 2011)

Addressed the question of whether a commissionnaire arrangement created a PE. The Norwegian Supreme Court found a PE existed based on the dependent agent provision.

Zimmer (France, 2010)

The French Supreme Administrative Court ruled that a commissionnaire did not constitute a PE under the pre-BEPS treaty provisions, as the agent contracted in its own name.

How Meridian Analyzes PE

Meridian follows a structured decision tree to evaluate PE risk, analyzing each category sequentially:

  1. Fixed Place PE — Is there a fixed place of business at the enterprise's disposal?
  2. Construction PE — Does a building site or installation project exceed the treaty threshold?
  3. Service PE — Are services furnished through employees present beyond 183 days?
  4. Agency PE — Does a dependent agent habitually conclude contracts or play the principal role?
  5. BEPS Action 7 — Do anti-fragmentation rules apply to combined preparatory/auxiliary activities?

At each step, relevant treaty provisions, domestic law, and applicable case law are analyzed against the client's specific facts.

Best practice

Always check for BEPS Action 7 anti-fragmentation rules when multiple preparatory/auxiliary activities are present.