ARTICLE 5

Permanent Establishment

This Article defines the term “permanent establishment,” which is relevant particularly to the taxation of business profits under Article 7 (Business Profits). Paragraph 1 defines the term "permanent establishment'' as a regular place of business through which the business of an enterprise is wholly or partly carried on. No difference in meaning is intended between the use of the term ''regular place of business" in the Convention and the more commonly used term "fixed place of business".

Paragraph 2 provides an illustrative list of regular places of business or activities which constitute a permanent establishment. The list includes: a place of management; a branch; an office; a factory; a workshop; a store or premises used as a sales outlet; a warehouse, in relation to a person providing storage facilities for others; and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. The term “'place of management”' is used in the

OECD Model Income Tax Convention. Since a place of management would in most cases require an office, which is specifically listed in paragraph 2, the insertion of "place of management" will generally not cause a regular place of business to be a permanent establishment if it would not otherwise be a permanent establishment. The reference to premises used as a "sales outlet" does not mean that premises used by an enterprise for the mere delivery of goods is a permanent establishment; additional significant activity by the enterprise at the premises, Such as the negotiation of sales, is necessary for the premises to constitute a "sales outlet" and a permanent establishment of the enterprise.

Paragraph 2(i) provides that a building or construction, assembly or installation, or a drilling rig or ship used for the exploration or development of natural resources within a Contracting State constitutes a permanent establishment, but only if the project or activity continues within that State for one or more periods totaling 183 days in a 12-month period. The time spent on supervisory activities connected with the project or activity included in determining whether the 183 day test has been met. For a permanent establishment to exist in any one year, however, the site, project, or activity must continue for at least 30 days in that year. If a construction project lasts for 190 days in total, 20 days in one year and 170 in the next, the project will constitute a permanent establishment, because it exceeds 183 days in the aggregate, though no permanent establishment will be deemed to exist during the first year. A series of contracts or projects which are interdependent both commercially and geographically is to be treated as a single project for the purpose of applying the 183-day test.

Paragraph 2(j) provides that a dredging project, such as deepening a port, constitutes a permanent establishment if the project continues for a period or periods aggregating more than 120 days in a 12-month period. However, as with a construction project, no permanent establishment will be deemed to exist in any year in which the dredging project exists for less than 30 days.

Paragraph 2(k) provides that the furnishing of services, including consultancy, management, technical and supervisory services, within a Contracting State by an enterprise through employees or other personnel constitutes a permanent establishment but only if; the activities continue within that State for a period or periods aggregating more than 90 days in any 12-month period (and for 30 days or more in the taxable year); or, the services are performed within that State for an associated enterprise. Whether an enterprise is an "associated enterprise" for this purpose is determined under the rules of Article 9 (Associated Enterprises).

Paragraph 2(l) provides that the maintenance of substantial equipment or machinery within a Contracting State constitutes a permanent establishment, but only if such equipment or machinery is maintained within that State for a period exceeding 120 consecutive days (and for 30 days or more in the taxable year).

Paragraph 3 overrides paragraphs 1 and 2 to provide that a regular place of business may be used for one or more of the following activities and not be a permanent establishment;

(a) the use of facilities solely for the purpose of storage, display, or delivery of goods or merchandise belonging to the enterprise, other than goods or merchandise held for sale by such enterprise in a store or premises used as a sales outlet;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery, other than goods or merchandise held for sale by such enterprise in a store or premises used as a sales outlet;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d) the maintenance of a regular place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;

(e) the maintenance of a regular 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.

The reference in subparagraph (e) to advertising, scientific research and supply of information is not intended to suggest that such activities are always auxiliary or that other activities cannot be auxiliary.

Paragraph 4 provides that if an enterprise of a Contracting State does not have a permanent establishment in the other Contracting State under paragraphs 1, 2 and 3, but goods or merchandise are either subjected to processing in that other Contracting State by another person (whether or not purchased in that other Contracting State), or are purchased in that other Contracting State (and such goods or merchandise are not subject to processing outside that other Contracting State), then such enterprise shall be considered to have a permanent establishment in that other Contracting State to the extent that all or part of such goods or merchandise is sold by or on behalf of such enterprise for use, consumption, or disposition in that other Contracting State.

Paragraphs 5 and 6 describe the permanent establishment implications of employees and agents. Under paragraph 5 a person (other than an agent of an independent status to whom paragraph 6 applies) acting in a Contracting State on behalf of an enterprise of the other Contracting State shall be deemed to be a permanent establishment in the first-mentioned State of that enterprise if:

(a) he habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those listed in paragraph 3 and are not described in paragraph 4; or,

(b) he habitually maintains in that State a stock of goods or merchandise from which he regularly delivers goods on behalf of the enterprise and additional activities conducted in that State on behalf of the enterprise have contributed to the conclusion of the sale of such goods or merchandise.

Thus, if a U.S. company that does not have a regular place of business in Barbados hires a person who does not have the power to conclude contracts on behalf of the company but who during a taxable year participates materially in Barbados in the negotiation of contracts for the sale of goods on behalf of the company to residents of Barbados, and regularly delivers such goods in Barbados to the purchasers on behalf of the company, the person is considered to be a permanent establishment of the U.S. company if he habitually maintains in Barbados a stock of goods from which he makes the deliveries.

Paragraph 6 provides that if an enterprise of one Contracting State merely carries on business in the other Contracting State through a broker or any other agent of independent status acting in the ordinary course of his business, the enterprise will not thereby be considered to have a permanent establishment in that other State. Paragraph 6 also provides, however, that such broker or agent will not be considered independent, and paragraph 6 shall not apply, if all his activities are devoted wholly, or almost wholly, on behalf of that enterprise and the transactions between the two are not conducted under arm's-length conditions.

Paragraph 7 provides that the fact that a company which is a resident of one Contracting State either controls or is controlled by a company which is a resident of the other Contracting State, or which is a resident of any State and carries on business in that other State, does not automatically render either company a permanent establishment of the other.