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Recent Developments in Permanent Establishment
Mumbai, 4 December 2009
Arvid Aage Skaar
1
The PE definition
• …the term ’permanent establishment’ means a fixed place of business through which the business of an enterprise is wholly or partly carried enterprise is wholly or partly carried on.
• Objective Subjective Functionality
–Physical -Right of use -Business
– Location -Duration -Connection
2
Current discussion
R Co Customer
State R State S
Issue 1
3
R Co Customer
RCo provides services to CustomerRCo uses facilities of Customers
Does RCo have a right of use?
Current discussion (2)
Customer
State R State S
Issue 2
R Co Service providerR Co buys a service
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Issue (1)Right of use or factual use?
• OECD Comm art 5 no 4:
–The place of business has to be owned, rented or otherwise at the ”disposal” of the taxpayerthe taxpayer
–Factual use is not enough
–What kind of legal right is required?
• OECD: Pitch in a market place, customs depot, etc
• OECD: Also in other enterprises’ premises
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OECD on illegal occupancy
• OECD Comm art 5 no 4.1
–Right of use also if the taxpayer illegallyoccupies a certain location
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OECD: ”The mere presence” is not enough
• OECD Comm art 5 no 4.2
–…the mere presence … does not …mean that the location is at the disposal of that enterprise… disposal of that enterprise…
–Example ”a salesman who regularly visits a … customer to take orders … in [the purchasing director’s]…office” does not have a right of use
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The OECD painter example
• Two years
• Three days a week
• Main client
• Painting (core business)business)
OECD PE
Germany No PE
8
The painter example (2)
• German view:
–The building is the object of the business activity
–The painter does not have a legal right of – The painter does not have a legal right of use to organize his business there
–German conclusion: The right of use test for PE is not met
9
The painter example (3)
Analysis:
Objective presence:
– Fixed place of business � building
Subjective presence:
– Right of use � ?
– Duration test � two years
Functionality:
– Business activity � painting
– Business connection test � in the building
10
The NATO Case
A
Contract
Cleaning of aircraft
GermanyNATO
C
B
The Netherlands
• Security clearance
• Limited access
• NATO equipment
• No office
• Room with telephone, telefax etc
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Contract
The NATO Case (2)
Analysis (2008):
The court: the mere ”Tätigwerden” is not enough
Objective presence:
– The fixed place of business � Cleaning hall
Subjective presence:Subjective presence:
– Right of use test � No right of use
– Duration test � Three years
Functionality:
– Core business test � Cleaning
– The connection test � Conducted in the hangar
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The US Army Case
USA
Points made by the court
”not only temporary right
Germany
S-Co US Army
• ”not only temporary right of use”
• ”not removed without consent
• ”lack of exclusive right of use”
• ”co-user’s consent from time to time”
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Facts• 1993-1995 –(2000)• War simulation system• Data collected from exercises • 50 employees• Work conducted in military buildings• Security clearance, limited access
The US Army Case (2)
Analysis (2004):
The court: the activities in the buildings were sufficient for PE
Objective presence:
– The fixed place of business � Buildings– The fixed place of business � Buildings
Subjective presence:
– Right of use test � Could not be removed from the buildings without its own consent � right of use
– Duration test � Many years
Functionality:
– � War simulation � Conducted in the buildings
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The Hotel Management Case
England Germany
P-NV
X-hotelchain
P-KG
Ltd
• ”Both building and roomsinside buildings may be a fixed place of business”
• ”All physical assets that mayserve as basis for a business activity”
• ”Not removed withoutconsent”
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• 1985-1983; 20-year contract
• Management of hotel; Serve as general manager
• Marketing activities
• Supervision and control of the business; Employments
• Bookeeping and accounts
The Hotel Management Case (2)
Analysis (1993):
The court: the activities in the hotel were sufficient for PE
Objective presence:
– The fixed place of business � Hotel– The fixed place of business � Hotel
Subjective presence:
– Right of use test � Manager could not be removed from the hotel without his own consent � right of use
– Duration test � Many years
Functionality:
– � Management � Conducted in the hotel
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Consultancy Case
Consultancyfirm
Client
Switzerland Germany
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firmClient
Consultancy firm provides services to Client using Client’s premises
Does the Consultancy firm have a right of use?
Consultancy Case (2)
Analysis (1990):
The court: the activities in the premises of the client were not sufficient for PE
Objective presence:
– The fixed place of business � Buildings– The fixed place of business � Buildings
Subjective presence:
– Right of use test � no right of use
– Duration test � More than a year
Functionality:
– � Advice/training � Conducted in the buildings
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Summary of German jurisprudence
1990 1993 2004 2008
ConsultancyCase
Hotel MangagerCase
US ArmyCase
NATOCase
No right of use Right of use Right of use No right of use
No PE PE PE No PE
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Insurance Agent Case
Germany Switzerland
1979 -1989Offshore bank �
Client
Office
Contract
Business
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• Illegal entrance intoSwitzerland
• No reporting to taxauthorities
• 2 % commission
Business
Insurance Agent Case (2)
Analysis (1995):
The court: a PE existed even though the taxpayer was not allowed to enter Switzerland
Objective presence:
– The fixed place of business � Building– The fixed place of business � Building
Subjective presence:
– Right of use test � Right of use in rented offices
– Duration test � Several years
Functionality:
– � Sale of insurance � Conducted in the office
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The Knights of Columbus
Insurance CoAuthorization
Living facilities
USA
Insurance agent�
Canada
Solicitation
• Preliminaryinsurance concluded
Solicitation
Customer• Application for insurance to be considered
• Underwriting
• Claims handling
22
�
The Knights of Columbus (2)
Analysis:
Objective presence:
– Fixed place of business � Living home
Subjective presence:
– Right of use test � No right of use
– Duration test � years
Functionality:
– Business activity � Solicitation
– The business connection test � Auxiliary
activities conducted at home (?)
23
The Dudney Case
Provision of services
USA Canada
� �
• Individualprovided services to company in Canada
• Used offices ofclient
24
The Dudney Case (2)
Analysis:
Objective presence:
– fixed place of business � office building
Subjective presence:
– Right of use test � client’s offices not enough
– Duration test � five days in each location
– Functionality:
– The business activity test � conditions met
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Service PEOECD and UN Model Treaties
OECD Model
• Performance of services by an enterprise through an
– Individual
UN Model
• Furnishing of services through employees and other personnel engaged by the – Individual
• 183 days in 12 months
• 50 per cent of revenue
– Personnel working on the same or connected project
• 183 days in 12 months
engaged by the enterprise for 6 months in any 12-month period
– Physical presence = ”personnel”
– Right of use= ”engaged by” the enterprise
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Service PE – UN Model
• Meaning of “other personnel engaged by”
Inc
EmployeesHired-in-personnel
Personnel from subcontractorCorporate “personnel”?
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Other personnel Client
Hired-in-personnel“Contractors”Free lancersJoint-venture personnel
Issue:-Power to instruct?-Responsible for the result?
Ltd
Issue (2) Doing business through a
subcontractor
Customer
State R State S
R Co Service providerR Co buys a service
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The Norwegian Safe Service Case
Oil company(Norway)
MainCo(Sweden)
Contract
Subcontractor
Subcontract
-MainCo fully responsible
-MainCo subcontracts everything
Subcontractor(Norway)
Catering Services on oil platform
-MainCo has no local presence
-Subcontractor independent
-Not a PE-caseConclusion: MainCo conducted business in Norway (through Subcontractor)
Simplified facts - slide from IFA Congress 2009
The Indian Power Grid Case
1/3/01 to 1/11/01: No MainCo employees
1/11/01 to 1/7/02:3 employees of MainCo presentfor supervision
1/10/02-31/12/02:MainCo
employees to superviseand test
1/2/03-1/6/03:MainCo
employeesre
warranty
1/3/01: Preparation begins
1/5/01: Construction begins.
31/12/02: Delivery to customer
and test warranty
Simplified facts - slide from IFA Congress 2009
The Indian Power Grid Case (2)
State RMAINCO
Design
Supply of equipment Supervision of installation
Testing of plant
State S CLIENTCOLOCALCO
SECURCO
Onshore construction &
installation
Simplified facts - slide from IFA Congress 2009
Other Recent Indian Cases
• The Ship Channel Case (Pintsch Bamag)
• The Cal Dive Marine Case
–Start of Construction PE–Start of Construction PE
• Negotiations – not included
• Planning and organizing the work
– Onsite - included
– Offsite – not included?
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Subcontractor PE
Main Contractor
Subcontractor
State R State S
Variation 1
PE?
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ContractorSubcontractor
CustomerContract
Main Contractor
4 months
Subcontractor
3 months
PE - yes-Only for its own business
Subcontractor PE (2)
Main Contractor
Subcontractor
State R State S
Variation 2
PE?
34
ContractorSubcontractor
CustomerContract
Subcontractor
13 months
No PE-No business-No agency
Legal or physical presence?
• Is a ”legal presence” sufficient for PE?
–The subcontractor ”represents” the contractor
–OECD Model accepts representation in –OECD Model accepts representation in the agency clause
• Requires authority to conclude contracts
–Outside the agency clause: No PE
–OECD Art 7: ”…the enterprise carries on business in the other … State”
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Other cases
• The French Zimmer Case (Appeal Court, not final)
–Legal presence through a commissionaire is not sufficient for PEcommissionaire is not sufficient for PE
–A Belgian Case (City court, final)
– Legal presence through subcontractor is not sufficient for PE
36
Conclusions
• Issue 1: A legal right of use is required for PE under the basic rule (unless exceptions excist, eg service PE rule)PE rule)
• Issue 2: A legal presence through a subcontractor is not sufficient for a PE
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