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Art. 5

XCo does not have a PE in Y under either Art. 5(1) or Art. 5(5). 

However, does the deemed PE for insurance companies, in Art. 5(6), apply? There are 2 alternative tests: (1) XCo "collects premiums in [Y] … through a person [other than an independent agent]"; and (2) XCo "insures risks situated [in Y] through a person [other than an independent agent]". 

The relevant person is YCo (see below in regard to the "independent agent" issue). 

Test (1) is not satisfied, because the premiums are paid directly by the customer to XCo. 

However, test (2) might be satisfied. Firstly, the risks might be "situated in [Y]" – this should be investigated. Secondly, arguably the insurance is “through” YCo. The word, “through”, in this context, is not explained in the UN Comm. Presumably, it means something other than the conclusion of a contract, because that would be covered by Art. 5(5)(a). It is quite possible that a situation where YCo introduces the customer to XCo and acts as the "communication channel" between the two, could be viewed as XCo insuring risks “through” YCo. 

Test (2) is subject to the "independent agent" exception in Art. 5(7), which has 2 conditions (both of which must be satisfied to qualify for the exception): (i) the person is “independent” of the enterprise; and (ii) the person is “acting in the ordinary course of their business”. 

Is YCo "independent" of XCo? Neither XCo's 100% ownership of YCo, nor the fact that YCo provides the “communication service” for no other insurance companies, would definitively lead to a conclusion that YCo is dependent on XCo. As there is nothing else in the facts which suggests dependence, I would conclude that condition (i) is probably satisfied. 

In regard to condition (ii), the UN Comm. adopts the view expressed in the 2010 OECD Comm. that “acting in the ordinary course of their business” refers to the activities customarily carried out in the agent’s trade, not the other business activities carried out by that agent. Thus, the fact that YCo does not provide this service to other insurance companies is irrelevant. In my view, the issue is: do insurance companies (possibly, restricted to those in Y) customarily provide such a “communication service”? 

As YCo charges an arm's length fee to XCo, the second sentence in Art. 5(7) does not apply. 

Thus, IMHO: XCo possibly has a PE in Y. 

Art. 7 

If XCo has a PE in Y, the profits attributable to the PE may be taxed in Y: Art. 7(1). 

Under the "authorised OECD approach", as described in the 2008 OECD report on the attribution of profits to PEs, the PE should be hypothesised as a separate and independent enterprise from the remainder of XCo, and the 2-step analysis should be used. 

Based on the question, it appears that none of the significant people functions (SPFs) (e.g., deciding on whether or not to accept the insurance risk, deciding on the premiums) are performed by YCo. Thus, the PE should be treated as a service provider. As the question states that YCo is paid an arm's length fee for its services (which would include the potentially valuable “customer introduction” service), and as YCo does not perform any SPFs, it is likely that the arm’s length fee would cause the profits attributable to the PE to be very low (or, possibly, nil).