Ask arvid 4 questions about permanent establishment
1. Are representative offices used for enhancing sales still exempt PEs in a post BEPS environment?
Representative offices (rep offices) are to my knowledge not mentioned specifically in the commentaries to the OECD model treaty. Nevertheless, the commentaries do respond to your questions indirectly, and the answer is that depending on the activities conducted through the rep office, such an office may or may not be a PE. No PE exists, if the rep office is engaged in an activity or combined activities that are not a core business activity covered either by the OECD 2014 model treaty art 5(4) or by the OECD 2017 model treaty art 5(4) and (4.1).
A typical rep office activity can be defined like this:
A representative office is an office established by a company or a legal entity to conduct marketing and other non-transactional operations, generally in a foreign country where a branch office or subsidiary is not warranted. Representative offices are generally easier to establish than a branch or subsidiary, as they are not used for actual “business” (e.g. sales) and therefore there is less incentive for them to be regulated.1
In this definition, the rep office is not engaged in a core business activity (sales, production, or management), but is conducting general marketing activities not related to actual sales. Advertising and public relation activities are not core business activities,2 unless connected to sales.3
A specific answer to the question depends on what is meant by “enhancing sales”. In general, all rep offices may be considered to enhance the sales of the enterprise; otherwise, the rep office should not have been set up. This is not sufficient to create a PE. However, if the activities of the rep office are combined with other activities in that country such as the activities of an independent agent who is concluding contracts on behalf of the foreign enterprise, it is likely that most countries would consider a PE to be constituted.4 This applies under both OECD 2014 and 2017 model treaties.
2. A sales representative lives and works in country A, close to the border with country B. The sales representative spends about 100 days a year in country B, where she visits customers and potential customers to push sales for products of her employer in country A, just like she does in country A. She is the country B customer’s fixed point of contact with her employer both for pre- and after sales services. The bonus of the sales representative is primarily dependent on the sales she generates
Does it make a difference whether the customers place their orders directly with the sales representative or orders their products from the head office after the sales representative has left. In both cases it is clear that she played a principal role in her customers placing those orders.
Under the OECD 2017 model treaty, the representative will create an agency PE given the facts described. The representative “plays a principal role” in the conclusion of contracts, and that is sufficient regardless of whether the orders are made directly to the principal or not.5 It is not required that the representative is a resident of country B or has a habitual abode in country B.
The conclusion under the pre-2017 OECD model treaties is the same provided that the orders placed by the customers are not subject to review by the principal. If the principal regularly rejects orders made by the representative’s customers, no agency PE is constituted.6 A PE is constituted, however, if the principal automatically accepts all orders.
3. Company A in country A has a sales team operating in country B. The sales realised by the sales team are recorded as sales of Company A. The sales team in country B is managed by a regional manager resident in country C and employed by company C in country C. Company C is a 100% subsidiary of company A. The regional manager visits country B 20 days a year. A part of his salary is charged from Company C to Company A as regional management services.
a) Does company A have a PE in country B?
Company A has an agency PE in country B. The sales team is concluding contracts on behalf of Company A.
b) Does company C have a PE in country B?
No (subject to a more detailed description of the facts). Company C is providing a service to Company A, which can reasonably be assumed to be a core business activity of Company C. However, a PE presupposes that Company C has the right to use (or factually uses) a fixed place of business in Country B for a substantial period of time. It is not sufficient with 20 days in the course of one year.7
4. Company A in country A has no employees in country B. It has 1 major independent distributor in country B. The distributor has 10 employees dedicated to the sales of company A’s products. Company A set these employees’ sales targets, manages their day to day activities and informs them which products to push. Company A also monitors the distributors inventory of company A products to ensure that the distributor always has Company A’s desired inventory levels on hand.
a) Does company A have a taxable presence in country B?
This set-up suggests that there is a close co-operation between Company A and the distributor, almost to the level of making the distributor into a representative of Company A. However, it is stated that the distributor is a “distributor” and “independent”.
I assume therefore that the distributor is purchasing the goods from Company A for its own risk and account and resells the goods in country B or elsewhere. The distributor does not involve Company A in business with third parties. Company A’s business in country B is limited to its sales to the distributor. This is not sufficient to create a PE.8
b) If the answer to a is no, would company A have a taxable presence in country B if company A also financed a part of the dedicated distributor employees’ salaries and bonuses through discounts on the goods sold from company A to the distributor?
Although this amplifies the impression of a close business co-operation, it should have no effect on Company A’s PE status. If the distributor bona fide operates as a distributor at its own risk and for its own account it does not create a PE for Company A, even if Company A finances the salaries/bonuses of some of the employees of the distributor through discounts.
c) If the answer to a is no, would company A have a taxable presence in country B if the dedicated employees had Company A business cards and email addresses?
Again, this amplifies the impression of a close business co-operation. Business cards and email addresses may give the impression that the employees work on behalf of Company A. However, if it is clear that the distributor purchases the goods from Company A and enter into contracts with third parties are between the distributor and the third party, this should have no effect on Company A’s PE status.
Kluwer International Tax Law offers a module focused fully on Permanent Establishments.
1. Wikipedia (read 27 September 2020).
2. OECD Comm 2017 art 5 no 70.
3. Skaar, Permanent establishment (2nd ed 2020) page 442.
5. OECD 2017 art 5(5); Skaar, Permanent establishment (2nd ed 2020) page 726 et seq.
6. Skaar, Permanent establishment (2nd ed 2020) page 728.
7. Skaar, Permanent establishment (2nd ed 2020) page 330.
8. OECD 2017 Comm art 5 no. 96; Skaar, Permanent establishment (2nd ed 2020) page 729.
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