Permanent establishment
A permanent establishment (PE) is a fixed place of business which generally gives rise to income or value added tax liability in a particular jurisdiction. The term is defined in many income tax treaties and most European Union Value Added Tax
European Union Value Added Tax
The European Union value added tax is the system of value added tax adopted by nations in the EU VAT area. The European Union itself does not collect the tax, but EU member states are each required to adopt a VAT that complies with the EU VAT system...

 systems. The tax systems in some civil law countries impose income and value added taxes only where an enterprise maintains a PE in the country. Definitions of PE under tax law or tax treaty may contain specific inclusions or exclusions.

Fixed Place of Business

The starting point for determination if a permanent establishment exists is generally a fixed place of business. The definition of permanent establishment in the OECD Model Income Tax Treaty is followed in most income tax treaties.

The commentary indicates that a fixed place of business has three components:
  • Fixed refers to a link between the place of business and a specific geographic point, as well as a degree of permanence with respect to the taxpayer. An "office hotel" may constitute a fixed place for a business for an enterprise that regularly uses different offices within the space. By contrast, where there is no commercial coherence, the fact that activities may be conducted within a limited geographic area should not result in that area being considered a fixed place of business.
  • A place of business. This refers to some facilities used by an enterprise for carrying out its business. The premises must be at the disposal of the enterprise. The mere presence of the enterprise at that place does not necessarily mean that it is a place of business of the enterprise. The facilities need not be the exclusive location, and they need not be used exclusively by that enterprise or for that business. However, the facilities must be those of the taxpayer, not another unrelated person. Thus, regular use of a customer's premises does not generally constitute a place of business.
  • Business of the enterprise must be carried on wholly or partly at the fixed place.

Specifically included Places

The following are generally considered, prima facie, as constituting permanent establishments:
  • A branch
  • A warehouse (but see excluded places below)
  • A factory
  • A mine or place of extraction of natural resources
  • A place of management

Specifically excluded Places

Many treaties explicitly exclude from the definition of PE places where certain activities are conducted. Generally, these exclusions do not apply if non-excluded activities are conducted at the fixed place of business. Among the excluded activities are:
  • Ancillary or preparatory activities
  • The use of a storage facility solely for delivery of goods to customers
  • The maintenance of a stock of goods owned by the enterprise solely for purposes of processing by another enterprise (sometimes referred to as toll processing)
  • Purchasing or information gathering activities

Other specific provisions

Many treaties provide specific rules with respect to construction sites. Under those treaties, a building site or construction or installation project constitutes a PE only if it lasts more than a specified length of time. The amount of time varies by treaty.

In addition, the activities of a dependent agent may give rise to a PE for the principal. Dependent agents may include employees or others under the control of the principal. A company is generally not considered an agent solely by reason of ownership of the agent company by the principal. However, activities of an independent agent generally are not attributed to the principal.

Some treaties deem a PE to exist for an enterprise of one country performing services in the other country for more than a specified length of time or for a related enterprise.
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