Permanent establishment

General meaning in treaties

In treaties that follow the OECD Model Tax Convention, a permanent establishment is a fixed place of business through which an enterprise carries on its business wholly or partly. It can also arise without a fixed place, through a dependent agent who habitually concludes contracts for the enterprise or, in many treaties, through services performed in the other country for more than a stated number of days. Preparatory or auxiliary activities are generally excluded. The source country may tax a foreign enterprise's business profits only to the extent that they are attributable to its permanent establishment there.

Meaning depends on the treaty

The IRS defines a permanent establishment generally as a fixed business place, such as management premises, a branch, an office, a factory, a warehouse, or a mining site, through which an enterprise operates.

Its examples describe locations, while treaty provisions can attach further conditions. This makes the treaty text relevant when identifying how the term applies to a particular income rule.^[1]

• A place of management is one example of a fixed business location in the IRS description.^[1]
• A branch, an office, a factory, a warehouse or a mining site is also a listed example.^[1]

Role in business profits and services

In the IRS discussion of Belgium, the treaty's Article 7, Business Profits, links the term to whether an individual's business profits are exempt from U.S. income tax. Those profits are exempt unless the individual has a U.S. permanent establishment, in which case tax applies to the profit attributable to that establishment.^[1]

Under the Bulgaria treaty, Article 5, Permanent Establishment, may treat services as provided through a permanent establishment even without a fixed business place. The Canada treaty contains the same rule.

The term also appears in employee income conditions. For Belgium, the IRS describes an exemption that applies when the worker meets a day limit, receives pay from a non-U.S. resident employer, and the income is not borne by the employer's U.S. permanent establishment. These are treaty-specific conditions for the stated exemption.^[1]

Related treaty terms and scope

A fixed base is a neighboring term in the IRS glossary definition. The IRS groups it with permanent establishment under a general fixed-place description, and individual treaties use the terms in differing ways. For example, several personal-services provisions refer to a fixed base regularly available for performing services and taxation of income attributable to it.^[1]

According to the OECD, the Model Tax Convention is a template for negotiating bilateral tax conventions and for interpreting and applying them.

Treaty provisions and income categories vary among countries. A saving clause in most income tax treaties limits treaty use by U.S. citizens or residents, because the United States generally keeps its right to tax them as if the treaty had not come into effect.

In more detail

The IRS gives a general definition, then notes that the exact meaning is set by the particular treaty and can vary among treaties. Its examples of a fixed place of business include a place of management, a branch, an office, a factory, a warehouse and a mining site.^[1]

Related reading

The treaty context connects to Income tax treaty, which describes country and income specific treaty rules. Tax residence covers residence status in treaty discussions. Treaty-based return position addresses claims that a treaty changes U.S. tax treatment. Foreign trust explains the U.S. tax tests used to classify a trust as foreign.

Questions and answers

Related terms

• Tax residence: Tax residence describes a person's status in a country for tax purposes. Treaty texts address how it affects income items and applicable treaty requirements.
• Income tax treaty: An income tax treaty may provide reduced U.S. tax rates or exemptions for specified U.S.-source income. Rules vary by country and income type under each treaty.
• Treaty rate table: A treaty rate table summarizes income categories and tax rates or exemptions under U.S. income tax treaties. The IRS explains the tables' scope and limits.

Related guides and articles

• How income tax treaties are structured: Income tax treaty terms and structure, related U.S. reporting for U.S. citizens, the OECD Model Tax Convention description and IRS guidance on treaty positions.
• The OECD Common Reporting Standard: The Common Reporting Standard sets rules for financial account reporting and the annual exchange of that information between jurisdictions, for U.S. citizens.
• How Discretionary Trusts Allocate Benefits: A guide for U.S. citizens to discretionary trust distributions, trustee choices about beneficiaries and payments, and the difference from fixed interests.

Related pages

• Glossary: All terms.
• Limitation on benefits
• Tax residence
• Treaty rate table
• IRS forms