TP BEPS Memory Trainer

Please see below an example question with an answer. 


7. What activities do not constitute a PE?


General answer

The permanent establishment threshold determines whether a business has sufficient activity in another territory to create a taxable presence in that other territory from a corporate tax perspective. Under OECD Model Convention(2017), it is the work of preparatory or auxiliary nature that can be exempted from being determined as a PE, provided that such activity or, in the case of a combination of preparatory work, the overall activity of the fixed place of business, is of a preparatory or auxiliary character. Alongside preparatory work, an independent agent does not constitute a PE neither.

In particular, Action 7 proposes to tackle the anti-fragmentation rules to prevent enterprises from splitting and allocating their activities into sites to avoid PE. And it also widens the scope of the agency PE clause and to limit the scope of the “independent agent” exception, introducing the anti-abuse rule to tackle artificial avoidance of PE status through commissionaire arrangements and similar strategies;


A-Ban is a company resident in country A, which manufactures and sells office supplies, including L-products, supplies of large dimensions. A-Ban has a subsidiary, B-Ban, an entity resident in country B. B-Ban owns a store in country B where it sells supplies acquired from A-Ban. A-Ban has also a warehouse located in country B, where it stores office supplies, including L-products. B-Ban’s store has limited storage capacity, therefore although it can display the L-products, it does not have the necessary space to store them. Therefore, when customers in country B ordered L-products, the employees of B-Ban need to collect them from A-Ban’s storage in country B, then deliver to the customers. Therefore, A-Ban continues to own the product until it leaves the warehouse to be delivered to clients in country B, when B-Ban officially acquires the product. A-Ban benefits from a specific activity exemption, as stated in Article 5 of OECD Tax Model Convention. Therefore, PE status is avoided since the use of the warehouse located in country B is listed as one of the exemption listed in Article 5, paragraph 4.

References, sources and further reading

There are two types of thresholds to apply for a permanent establishment: preparatory or auxiliary thresholds. The thresholds are described in Article 5, under the form of conditions which must be respected to qualify as a PE. Since Paragraph 2 of Article 5 of the OECD Model Tax Convention provides the places of business which must be considered as PE under Paragraph 1 on the condition that it meets the requirements of that paragraph; however, the remaining of Article 5 sets out exceptions where if each of the activities listed in subparagraphs a) to d) is the only activity carried on at a fixed place of business, the place is deemed not to constitute a permanent establishment.

One of the proposed actions of BEPS concerns Paragraph 4 of Article 5 of the OECD Model Tax Convention, with the prevention of artificial avoidance of PE status through the specific activity exemptions for preparatory and auxiliary thresholds with an option to add a new anti-fragmentation rule in case the new definition is not adopted. The BEPS report also assures that there will be no particular PE thresholds for insurance businesses in the model tax treaty. However, it was proposed that insurance businesses are to be treated in a similar manner as any other industry (unless variations are negotiated in bilateral agreements between certain countries).

  1. Click here to read “The OECD/G20 Base Erosion and Profit Shifting Project- Action 7, final report, October 5, 2015”
  2. Click here to read “Interpretation and application of Article 5 (permanent establishment) of the OECD Model Tax Convention 12 October 2011 to 10 February 2012”
  3. Click here to read “Revised discussion draft BEPS Action 7: Preventing The Artificial Avoidance of PE Status 15 May 2015 – 12 June 2015”
  4. Click here to read “BEPS in 5 minutes, Final Action Plan on Base Erosion and Profit Shifting, TPA Global.” [only for TPA internal use]
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