2.1.5. Preventing the artificial avoidance of Permanent Establishment Status (Action 7) 58
The definition of permanent establishment (PE) comprised in Article 5 of the OECD Model Tax Convention provides that the business profits of an enterprise are taxable in a State only to the extent that the enterprise has in that State a PE. Action 7 deals with tax avoidance techniques aimed at circumventing this definition. In particular,
- Use of commissionaire arrangements and similar strategies
Commissionaire arrangements are arrangements through which a person sells products in a State in its own name but on behalf of a foreign enterprise that is the owner of these products. Through this type of arrangement, a company is able to sell its products in a State without having a PE to which the profits generated by the sales would have been attributed and thus to avoid corporate income tax on those profits. This results in a shifting of profits out of the country where the sales take place. Similar results can be achieved through similar arrangements where contracts that are substantially negotiated in a State are not concluded in that State because they are finalised or authorised abroad, or where the person who concludes contracts is an "independent agent" to whom the exception of Article 5(6) is applicable.
- Exploitation of the specific activity exemptions
Article 5(4) includes a list of exceptions (the "specific activity exemptions") according to which a PE is deemed not to exist where a place of business is only used to carry out the activities that are listed in that paragraph. However, given the changes in business conditions, including the digitalisation of the economy, activities that were previously considered to have a preparatory or auxiliary character may now correspond to core business activities. Also, strategies based on a "fragmentation of activities" where used by companies to benefit from the exception of Article 5(4).
- Splitting-up of contracts
The splitting-up of contracts between closely related parties in order to avoid the application of Article 5(3) which applies to construction sites.
The OECD/G20 Final Report on Action 7 proposes an updated version of the definition of PE which should make it more resilient against artificial structures to circumvent its application, in the light of the above-mentioned concerns.
