Profits of Permanent Establishment-Taxability

1)   Introduction 

A Permanent Establishment (“PE”) is established when a foreign company or an entity has a significant presence or a fixed place of business in a jurisdiction where it conducts its business activities.

The OECD Guidelines require all relevant PE profits to be taxed in the host country, ensuring the country’s taxation rights and the accurate profit allocation of multinational enterprises.

2)   Types of PE:

• Fixed place
• Construction
• Agency
• Service
• Dependent agent

3)   Steps for profit attribution:

Step 1

Perform a functional and factual analysis and identify:

• Functions performed
• Risk assumed
• Asset used

Step 2

• Determining the profits of the PE as an independent enterprise.
• Apply an appropriate profit attribution method to allocate the profits as per the ALP.

4)   Role of Double Tax Treaties:

• Allocation of taxing rights
• Avoidance of double taxation
• Profit attribution methods
• Establishes criteria to determine existence of a PE
• Dispute resolution

5)   Challenges:

• Accurately attributing profits can be intricate and subjective, often resulting in disputes between tax authorities and multinational enterprises.
• Defining the value of functions performed, risks assumed, and assets employed by a PE.

6)   How can Crowe help?

• Advising on structuring PE operations in a tax-efficient manner while ensuring compliance with relevant tax laws and regulations.
• Navigate the complexities of tax treaties, ensuring that the benefits and obligations under the treaty are properly applied to PE profits.