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1. Fees paid by YCo 

1.1 X/Y treaty:

The fees would qualify as “fees for technical services” (FTS), as defined in Art. 12A(3). Thus, Y may tax XCo on the fees, subject to the rate limit in Art. 12A(2). X must give XCo a credit for the Y tax, under Art. 23B(1). 

1.2 X/Z treaty: 

The threshold issue is whether XCo has a PE in Z under the X/Z treaty. There probably is no Art. 5(3)(b) PE, due to the fact that the 2 employees do not work on weekends or public holidays, which would make it unlikely that the “183 days” condition is satisfied. However, there is probably an Art. 5(1) PE at the WeWork co-working space, despite the hot desking: this should constitute a specific geographical place, and the employees’ use of the space means that it is at their disposal. Although at the start it was thought that the employees would be in Z for a continuous period of 4 months (which would generally be too short for Art. 5(1)), the UN Comm. makes clear that it is the actual time which matters: 7 months should be sufficient for Art. 5(1), despite the weekends and public holidays. 

If XCo has a PE in Z, then Z is permitted to tax XCo on the profits attributable to the PE: Art. 7. In determining those profits: (a) the fees referable to the work performed at the PE in Z would need to be identified, from the total fees paid by YCo to XCo; and (b) expenses which relate to the PE (e.g., salaries for the 2 employees while they were at the PE, plus their travel, accommodation and living expenses) would need to be deducted: Art. 7(2). Also, in relation to (b), a “head office” notional charge (set at cost: Art. 7(3)) for head office supervision of the work, should also be deducted. 

It is unclear whether, in determining the Z tax on XCo’s PE, Z must give a notional credit for the Y withholding tax. Such a notional credit would arise by virtue of Art. 24(3) of the X/Z treaty, the non-discrimination provision in regard to PEs. The 2017 UN Comm. on Art. 24(3) reproduces the 2017 OECD Comm. discussion of this point, but it is limited to dividends, interest and royalties – FTS is not mentioned. If a credit is required, it will be equal to the lower of the Art. 12A(2) tax rates in the X/Y and Y/Z treaties, respectively. 

X must give XCo a credit for the Z tax paid: Art. 23B(1). 

2. Salaries 

Salaries for the 2 employees while they were at the PE, may be taxed by Z: Art. 15(1) & (2), X/Z treaty. X must give the employees a credit for the Z tax paid: Art. 23B(1).