Tax Treaty Series

ITQ T-

004

July 12, 2019

Question

Article 5(2) of the OECD model double tax treaty commences: "The term 'permanent establishment' includes especially:", and then it sets out 6 paragraphs, (a) to (f). Paragraph (c) is "an office". RCO (resident of country R) owns an office in country S. Does RCO have a "permanent establishment" in country S under the R / S treaty (identical to the OECD model treaty) – yes, no, or possibly? Why?

Answer

Possibly.

Preliminary point: According to the OECD Commentary, Article 5(2) is merely a list of examples which might constitute a PE, but only if the conditions in Article 5(1) are satisfied. [Disagreement registered by Greece (member) and India (non-member).]

The insufficient facts contain 3 unresolved issues.

Firstly, are all the conditions in Article 5(1) satisfied? Possibly. It is unclear whether the office is at the disposal of RCO and whether RCO is wholly or partly carrying on its business through the office. For example, RCO might lease the office to a tenant – in which case, according to the OECD Commentary, the office would not be at RCO’s disposal. [Disagreement registered by Argentina (non-member) and India (non-member).]

Secondly, even if Article 5(1) is satisfied, does one of the paragraphs in Article 5(4) apply? Possibly. If the office were used by RCO solely for activities of a preparatory or auxiliary character, then Article 5(4) (prima facie) would apply to provide an exception to PE status.

Thirdly, if Article 5(4) prima facie applies, does Article 5(4.1) (the anti-fragmentation rule) apply to prevent such application of Article 5(4)? Possibly.

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