Criteria & Guidelines on Permanent Establishment (PE)

Introduction

The profits of an enterprise of a country with which Ireland has a double taxation convention are generally taxable in the State only where the enterprise has a Permanent Establishment (PE) here. This article:

Sets out the criteria for determining the existence of a PE

and

Gives guidelines on how these criteria are applied in the construction industry.

Given the level of cross border business activity, particular reference is made to the Ireland/UK Convention. The text of Article 5 of the Ireland/UK Convention is given on Page 14.

Definition

Article 5(1) of the Ireland/UK Convention defines the term ‘permanent establishment’ as being

“a fixed place of business in the State in which the business of the enterprise is wholly or partly carried on”.

Article 1(d) of the Convention provides that, “enterprise of a Contracting State” and “enterprise of the other Contracting State” mean respectively

• An enterprise carried on by a resident of a Contracting State
  and
• An enterprise carried on by a resident of the other Contracting State.

Article 5(2) of the Convention contains a list of examples of what is generally regarded as constituting a PE. However, the examples listed are PE’s only where they fall within the terms of the definition in Article 5(1).

Criteria to determine if a PE exists

Whether or not a PE exists is a question of fact. Each case must be considered on its own facts. Below are guidelines for determining whether a PE exists, i.e. whether there is “a fixed place of business in the State in which the business of the enterprise is wholly or partly carried on”.

There must be a place of business

A place, though normally a particular portion of space, is to be read in the context of it being used to define “establishment”. The term “place of business”, therefore, means all the tangible assets used for carrying on the business. It covers any premises, facilities or installations used for carrying on the business whether or not they are used exclusively for that purpose. Thus, a place of business may exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal.

The place of business may be situated in the business facilities of another enterprise. It may be owned or rented by or be otherwise at the disposal of the business.

The place of business must be fixed

• The place of business must be established at a certain place. In this regard it is necessary that a link exists between the place of business and a specific geographical point.
• For equipment to constitute a PE, it must remain on a particular site but does not have to be fixed to the soil on which it stands. Where roads are being built, canals constructed etc. and the activities performed at each particular spot are part of a single project, the project is regarded as a PE.
• The place of business must have a certain degree of permanency. Mere business relations with enterprises or other customers in the contracting State do not give the requisite degree of permanency. Similarly, a place of business which is of a purely temporary nature cannot constitute a PE, e.g. a once-off stall at a trade exhibition.A place of business which is not of a purely temporary nature can be a PE even if it exists in practice only for a very short period of time because of
  • the special nature of the activity (e.g. a building site), or
  • as a consequence of special circumstances (e.g. death of the taxpayer, investment failure), it was prematurely liquidated.

The business must be wholly or partly carried on in the fixed place of business

For a place of business to constitute a PE, the enterprise using it must carry on its business wholly or partly in it. The activity need not be of a productive character. Interruptions of operations encountered in the normal course of the business of an enterprise do not affect the permanence test, provided the business activities are resumed at the same place. Operations must be carried out on a regular basis. For example, a space in a market place could be a PE provided it is occupied regularly over a period.

Agents

Article 5(4) of the Ireland/UK Convention deals with dependent agents. A dependent agent of a UK enterprise who has and habitually exercises in the State, an authority to conclude contracts in the name of the enterprise, constitutes a PE here.

Dependent

The agent must be dependent on the enterprise he/she represents. He/she must not have independent status of the kind referred to in Article 5(6) (e.g. brokers, general commission agents). An agent who is bound to follow instructions relating to the business is dependent on the enterprise. Employees of an enterprise are always dependent agents.An agent must have power to bind the enterprise.

Authority to Conclude Contracts

The dependent agent must have authority to conclude contracts in the name of the enterprise he/she represents. Whether or not an agent has such authority is a question of fact and is normally decided against the background of the economic situation. If there are valid reasons for the enterprise to reserve its right to conclude contracts itself (e.g. where major contracts are involved) the agent may be considered not to have an authority to conclude contracts. If the agent has authority to negotiate all elements of a contract in a way which is binding on the enterprise, the agent is regarded as exercising his/her authority in the State, even if formal signature of the contract is made by some other person outside the State. The authority could be restricted to specific lines of business within the enterprise’s overall business activities. If this is the case, the profits attributable to the PE would be restricted to profits arising from business contracted by the agent. Direct transactions by the enterprise would be disregarded for the purposes of determining profits attributable to the PE.

The agent must habitually exercise in the State his/her authority to conclude contracts in the name of the enterprise. There must be a certain degree of permanence. An agent would not constitute a PE on the basis of the conclusion of a single contract. The frequency with which an agent concludes contracts will amount to habitual exercise if it corresponds with what is normal in the line of business concerned. In cases of doubt, the continuity of the agent’s exercise of authority should be measured by application of the same criteria as those applied under the general PE concept laid down in Article 5(1). It is not necessary that the continuous activity be exercised throughout by the same person. It is sufficient for the post of dependent agent to have been established.

Residence

It is not necessary that the agent must be resident in the State. It is considered that where the foreign enterprise is a sole trader or partnership, the sole trader or any of the partners would be an agent for this purpose. Thus, a Northern Ireland subcontractor who habitually concludes contracts in the State in the name of the enterprise constitutes a PE of the UK enterprise.

Construction Industry - Existence of a PE

Under Article 8 of the Ireland/UK Convention, the profits of a UK based enterprise are taxable in the State only if the enterprise carries on business here through a PE situated here. While all the general principles outlined earlier apply to the construction industry, particular difficulties arise in determining whether a PE is in existence in construction cases. This is especially so where the question to be determined is whether, in a particular case, a building site constitutes a PE.Given the high number of Northern Ireland based enterprises who carry out construction work in the State, Article 5 of the Ireland/UK Convention is regularly invoked to establish the existence or otherwise of a PE in the State. Article 5(3) of the OECD Model Convention provides

“A building site or construction or installation project constitutes a permanent establishment only if it lasts more than 12 months.”

Unlike the OECD Model Convention, the Ireland/UK Convention makes no reference to building sites.

Revenue’s view is that, as the Ireland/UK Convention does not specify a period of time before which a building site cannot be a PE, every building site which is a fixed place of business in which the business of the enterprise is wholly or partly carried on, is a PE.

In this context:

• The place of business is the building site itself
• The place of business is at a fixed location - the site
• The work is wholly or partly carried on in the building site.

A building site is generally regarded as having the requisite degree of permanency as regards a contractor, if the contractor is present on the site for two or more months. However, a building site isregarded as a PE if in existence for a shorter period, where:

• A contractor brings a significant amount of plant, machinery or equipment onto it,
  or
• The contract is a significiant one. In general, Revenue would regard any contract valued at ₤500,000 or more as constituting a PE.

Revenue also takes the view that in the case of roadbuilding, the building site is any point along the roadway or proposed roadway where machinery may be left at night.

Meat Industry -Existence of a PE

Where a contractor provides services in a meat factory, the factory premises can constitute a PE where the requirements mentioned above under the heading “Criteria to Determine if a PE exisits” are satisfied.

Mutual Agreement Procedure

Where a person has a PE in the State, he/she is taxable here on the profits attributable to the PE. Under the Ireland/UK Convention, a UK resident with a PE in the State is entitled to credit in the UK for tax paid in the State in respect of profits attributable to the PE. If the UK Inland Revenue rule that the person does not have a PE in this State, credit for Irish tax will not be allowed against the persons UK tax liability. In this event, the person should request a review under Article 24 of the Convention (i.e. mutual agreement). Under the terms of Article 24, the two authorities will arrive at a mutual determination regarding the existence of a PE in the State. The request for such a review should be made to the Revenue Authority of the State in which the person is resident.

Article 5 Ireland/UK Convention Permanent Establishment

1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business in the State in which the business of the enterprise is wholly or partly carried on.
2. The term “permanent establishment” shall include especially:
   1. a place of management;
   2. a branch;
   3. office;
   4. a factory;
   5. workshop;
   6. a mine, oil well, quarry, or other place of extraction of natural resources;
   7. an installation or structure used for the exploration of natural resources.
3. The term “permanent establishment” shall not be deemed to include:
   1. the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
   2. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
   3. the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
   4. the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise;
   5. the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise.
4. A person acting in a Contracting State on behalf of an enterprise of the other Contracting State - other than an agent of independent status to whom the provisions of paragraph (6) of this Article apply - shall be deemed to be a permanent establishment in the first-mentioned State if he has, and habitually exercises in that State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise.
5. A person carrying on activities in connection with the exploration or exploitation of the sea bed and sub-soil and their natural resources situated in a Contracting State shall be deemed to be carrying on a trade through a permanent establishment in that Contracting State.
6. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business.
7. The fact that a company whichis a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.