Tax Treaty Series

ITQ T-

089

June 4, 2021

Question

XCo, a company resident in X, is a major business consulting company. It has a representative office in Y, with one employee (Mr S). Mr S's role is to look for business opportunities in Y for XCo.

Following a suggestion from Mr S, XCo has sought to obtain consulting contracts with several specific companies resident in Y. To secure those contracts, senior executives of XCo have made numerous visits to Y to meet with the Y companies and discuss opportunities. Also discussed at the meetings were the key terms of XCo's proposed contracts. The meetings each lasted up to 3 days and took place at the Y companies' respective offices. The XCo senior executives spent very little time in the premises of the representative office.

Mr S attended all of those meetings, but played no role in the discussions.

Several (assume 4) proposed contracts are now ready for signature by each pair of parties (XCo and the respective Y company). The plan is that each contract will be signed at a "signing ceremony" at the Y office of the respective Y company. It is also planned that the XCo senior executives would not attend those signing ceremonies – instead, XCo would give Mr S a power of attorney to sign those contracts on XCo's behalf.

The X/Y treaty is identical to the 2014 OECD model treaty.

Will XCo have a PE in Y under the treaty? If so, how would the profits attributable to the PE be determined?

Answer

"Fixed place of business" PE
1. The representative office would satisfy Art. 5(1). However, it would probably be excluded from PE status under Art. 5(4)(d) (collection of information) or Art. 5(4)(e) (other preparatory or auxiliary activity): see OECD Comm.
2. The offices of the Y companies would not satisfy Art. 5(1).
3. Thus, no "fixed place of business" PE.
"Contract-concluding agency" PE
1. Subject to the "habitually" issue, Mr S would satisfy Art. 5(5), if (as is likely) his signature concludes a contract which is binding on XCo under the relevant contractual law.
2. "Habitually" issue: OECD Comm does not provide a brightline test – it only says that "habitually" means repeatedly, and does not mean merely transitory or in isolated cases. IMHO: 4 cases would likely be sufficient to be "habitually".
3. Mr S, being XCo's employee, cannot satisfy Art. 5(6).
4. Thus, a "contract-concluding agency" PE would likely exist. The extent of the PE would be all of the functions performed by Mr S for XCo (not merely the signature function).
Profit attributable to PE
1. The "separate and independent enterprise" assumption applies: Art. 7(2).
2. Under that assumption, XCo's functions, assets and risks would be allocated to the PE, based on the extent of Mr S's significant people functions (SPFs).
3. The facts do not indicate that Mr S performs any SPFs. It's possible that Mr S has developed important relationships with the senior management of the Y companies, and these relationships were important in securing meetings with the Y companies – however, the facts don’t state that.
4. If Mr S did not have important relationships with the Y companies, nil (or only nominal) profit should be attributed to the PE. If, however, Mr S did leverage his important relationships to secure meetings with the Y companies, then those relationships should be attributed as an asset to the PE, and that asset should then be rewarded in an allocation of profit to the PE.

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