Permanent establishments: Changing rules and behaviour

By Mike Cooper

In a recent South African case the Court took a position on what constitutes a fixed place of business that will cause many to pause for thought. The Court held that the exclusive use of a South African client’s board room by an overseas consulting firm for the duration of their project constituted a fixed place of business giving rise to a permanent establishment (PE) in its own right, irrespective of arguments around a service PE. While this particular point is not a core focus of the BEPS papers it is part of a growing body of evidence that tax authorities are asserting PEs under existing rules where they may not have done before, and that Courts are prepared to view those claims sympathetically.

More directly related to the BEPS output is the fact that the new Chinese/Chilean tax treaty (signed in May although not yet in force) adopts many of the features proposed in the latest draft of the BEPS PE paper. These include two particularly noteworthy points:

  • firstly, in line with the BEPS proposal the treaty lowers the threshold for triggering a dependent agent PE to bring in situations where contracts are not signed by the company in territory but where it habitually negotiates material elements of the contract there; and
  • secondly, the ability to claim exemption for a fixed place of business which is only involved in warehousing and similar activities is now restricted to only those situations where that activity can be shown to be of a “preparatory or auxiliary” character. 

Both of these changes are in line with the BEPS proposals and are likely to increase the number of PEs materially.

These are just two examples of the way that the PE landscape is changing and the direction of those changes is consistent in providing for a greater number of PEs to exist. As such, companies should be reviewing the way that they operate to assess where PE may be heightened, the potential impact of that and strategies for mitigating that impact. To find out more, view our animation here or speak to your usual PwC adviser.

Mike Cooper

[email protected] /0207 213 5212