Tax & Accounting Blog

Treaty Exemptions for Business Profits – Part 4: Permanent Establishment

ONESOURCE, Tax Information Reporting, W-8 & W-9 Foreign Reporting March 29, 2012

The definition of a permanent establishment may be found in the Permanent Establishment Article (typically article 5) of the applicable treaty. An enterprise has a permanent establishment if it has “a fixed place of business through which the enterprise carries on its business in whole or in part.” It may be a place of management, an office, a branch, a factory, a workshop or a place of extraction of natural resources (see Article 5(1) of the U.S. Model Treaty). Most treaties include in the definition a site where specified activities (such as exploitation of natural resources or a construction project or installation project) are carried on, provided the activities last for a specified period of time. (Specified times vary by treaty from six months to 24 months.) The definition typically includes a list of preparatory and ancillary activities carried on through a fixed place of business that will not give rise to a permanent establishment, such as the warehousing of goods solely for the purpose of storage, display or delivery.

An enterprise will also have a permanent establishment if it has an agent in the U.S. that habitually exercises authority to conclude contracts for goods or services on behalf of the enterprise. A number of treaties also specify conditions under which the provision of other services in the U.S. by an enterprise’s employees or contractors will cause an enterprise to have a U.S. permanent establishment.