Tax Treaty Series

ITQ T-

080

March 19, 2021

Question

ACo, a company resident in A, manufactures and sells pharmaceutical products.

For the market in B, ACo sells the products to several unrelated distributors which are resident in B. These distributors sell the products to hospitals and medical clinics in B, at prices recommended by ACo.

To increase its sales in B, ACo employs 2 retired doctors to conduct marketing activities with doctors in those hospitals and medical clinics. The marketing activities involve face-to-face meetings and telephone discussions with those doctors, to explain the benefits and price list of ACo's products and answer any technical questions. The performance evaluations of the 2 retired doctors, and therefore their bonuses, place a strong emphasis on increases in ACo's sales in B.

The 2 retired doctors perform their marketing activities in visits to the hospitals and medical clinics, and also via telephone discussions from their home offices. They also perform some other employment activities (e.g., writing reports to ACo, liaising with ACo in regard to hospital and clinic visits) from their home offices. ACo does not provide them with office facilities.

The 2 retired doctors have no interaction with the distributors in B.

The A/B treaty is identical to the 2014 OECD model treaty.

Does ACo have a PE in B under the A/B treaty?

Answer

The doctors' home offices probably satisfy the conditions in Art. 5(1). In regard to the "at the disposal" condition, the fact that ACo has not provided office facilities to the doctors, and yet the doctors conduct some of their marketing activities via telephone, indicates that ACo probably requires that the home offices be used: para. 18, 2017 OECD Comm. (IMHO: this view is relevant also to the 2014 OECD model treaty). In contrast, the hospitals and medical clinics would not satisfy the "at the disposal" condition: adapting para. 4.2, 2014 OECD Comm.

The key issue is whether the doctors' activities at the home offices are solely of a preparatory or auxiliary character (POAC), from ACo's perspective: exception in Art. 5(4)(e). It is true that the doctors have no interaction with the distributors, and are thus not part of the selling process. However, they do perform an important marketing activity: if they generate interest in ACo's products amongst the hospitals and medical clinics, ACo's sales to the distributors will likely increase. Nevertheless, the 2014 OECD Comm. lists as an example of POAC a place which is used for the purpose of advertising – that would seem to cover the doctors' activities in this case.

In a recent Danish case (SKM2021.118.SR), the National Tax Board ruled that similar activities qualify as POAC.

In regard to the "solely" requirement of POAC, the "other employment activities" performed by the doctors in their home offices, IMHO, are incidental to the doctors' marketing activities, and thus they should have the same character as those marketing activities.

IMHO: Art. 5(4)(e) is probably satisfied in regard to all of the activities performed in the home offices – thus, no Art. 5(1) PE.

And, of course, Art. 5(5) is not satisfied.

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