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A permanent establishment (PE) is a fixed place of business which generally gives rise to income or value-added tax liability in a particular jurisdiction. The term is defined in many income tax treaties and in most European Union Value Added Tax systems.

Significance :-

In all these years after qualifying as a Chartered Accountant whenever i come across many techincal definitions or scenarios what i ultimately bank on is my general logic and try and think what would be the intention behind the law or definition.The same thing i will try and do here.

If you divulge too much into how is PE definied in different treaties and take meaning out of each word and interpret it and debate it it can run into endless discussion.However if you go behind the intention you will be better placed to understand the meaning of the same.The intention of the legislature behind defining a PE is to distinguish between dealing with the country as opposed to dealing in the country.So what’s the difference.For that lets understand the basic fundamentals of taxation in almost all countries.

Right to tax:-

The primary right to tax in every country is first based on resident and then source.Reason is that primarily resident country is the one who has taken care of the person for that year.However in certain cases Source country feels that it also needs to tax certain transactions.This is where PE and DTAA comes into picture.Meaning a source country can consider taxing business transaction only if that business transaction is carried out with PE in the source country.For eg you cannot tax the export of goods in source country.Meaning you cannot tax a transaction just because of dealing with that country.However if country has established a permanent connection and regularly carries on business in the country then there is logic of taxing that transaction.Thus the logic of PE.


While understanding the basic logic of DTAA one thumb rule or intention behind the DTAA which you should not forget is that the intention is to keep the total tax same and just divide it between source and resident.If only resident country was taxing every transaction then there wouldnt have been need for any DTAA or definition of PE.Also important thing to note here is that in India there is no definition of PE,it only defines business connection.PE is only defined in DTAA.So whether the transaction is carried on through PE or not one needs to read the specific DTAA of that country with India and see the definition of PE.on prime reading every DTAA might look similar but while going deeper there are many small differences due to which certain transactions might be taxed if carried on by certain countries and not if carried on by other.

Then ofcourse whole lot of debate comes up due to the fact that when can you consider that it has PE and all the definitions come into play for Agency PE,Fixed place PE etc.Also in absence of DTAA there is a chance that same transaction can be taxed twice in hands of assesse  if that transaction is taxed under both the countries and there is no DTAA to avoid double taxation.

Why so many case laws:-

As I mentioned earlier that if every assesse  and assessing officer understands the intention of law and in addition their own intentions are honest and clear then we wont have many case laws.However that’s not always the case.It is when you understand a law in a manner which is convenient to you and forget the intention that is when there are problems.For eg Agency PE is generally defined in every DTAA to be established when agent is a dependent agent and has authority to sign the contracts.Now based on that one word of authority to sign the contract assesses may misuse the definition and practically carry on whole lot of business through establishing agency PE and yet come out without establishing PE just by giving authority of signing contract to someone else.

Modern PE:-

With times changing the definition of PE is also changing as in modern times you can indeed carry on transactions without a need to establish a fixed place of business in that country especially in digital world.Hence there have been cases where even without having fixed place of business courts have considered such transactions as taxable..After so many years of free but legitimate  profits earned by Google,Facebook etc world over tax authorities felt a need to change and hence evolution of BEPS and multilateral treaties.

These are changing times and the entire basis of taxation is changing due to the way in which business is carried on these days.I hope that common sense prevails.In this changing times professionals and asssessee along with tax authorities need to again go behind the intention of law so as to avoid thousands of case laws.


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Qualified in 2006.Has done Post qualification course of Management in Business Finance and Diploma in International Taxation.He believes that where there is passion there is way View Full Profile

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July 2024