Tax Treaty Series

ITQ T-

035

March 13, 2020

Question

XCo, a company resident in X, acts as toll manufacturer (TM) for related party YCo, a company resident in Y. XCo has no activities other than acting as TM for YCo.

Under the TM agreement:

YCo owns manufacturing moulds, which are transferred to XCo's premises in X for use in the TM process
XCo receives, directly from third party suppliers, materials which have been sold by those suppliers to YCo (XCo concludes the purchase contracts on behalf of YCo)
XCo uses the materials to manufacture finished goods (FG), in accordance with patents which are owned by YCo and licensed to XCo (royalty-free) solely for the purposes of the agreement
At all stages of manufacture, the goods are owned by YCo
At the end of the manufacturing process, the FG are stored by XCo for an average of 10 days, and are then transferred to destinations outside X, as directed by YCO
YCo pays a fee to XCo for its services

The transfer of the materials from the suppliers to XCo, and the transfer of the FG from XCo to destinations outside X, are performed by third party logistics companies, as a service for YCo.

None of YCo's employees ever visit XCo's premises.

The X/Y treaty is identical to the 2014 OECD model treaty. The MLI does not apply to that treaty.

Does YCo have a PE in X?

Answer

Art. 5(1):

Key issue: are XCo's premises "at the disposal" of YCo?:
Due to the TM activities? No: 2017 OECD Comm., para. 67
Due to post-manufacture storage of FG? No: 2017 OECD Comm., para. 65
Due to presence of YCo's moulds? No – similar to leasing of equipment: 2017 OECD Comm., para. 36
Due to XCo's purchasing activities? No: 2017 OECD Comm., para. 118
Thus, no Art. 5(1) PE

Art. 5(5):

First part (habitually exercises authority to conclude contracts in YCo's name): satisfied
Second part (exception – notional application of Art. 5(4) – is "combination of activities" in subpara. (f) satisfied?):
Maintenance of YCo's materials for TM purposes? Yes: subpara. (c)
Post-manufacture storage of FG? Yes: subpara. (a)/(b)
Presence of YCo's moulds, for TM purposes? Likely yes: subpara. (e)
XCo's purchasing activities? Yes: subpara. (d)
However, actual TM activity (cf. maintenance of materials for TM purposes) is not covered in Art. 5(4), but it is an activity which XCo undertakes for YCo
On balance, I think that Art. 5(4)(f) is not satisfied
Thus, Art. 5(5) PE

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