ARTICLE 9

Permanent Establishment

This article defines the term "permanent establishment". The existence of a permanent establishment is, under the terms of the Convention, a prerequisite for one State to tax the industrial or commercial profits of a resident of the other State. The concept is also significant in determining the applicability of other provisions of the Convention, such as Articles 12 (relating to dividends), 13 (relating to interest), 14 (relating to royalties), and 16 (relating to capital gains). The definition of "permanent establishment” is a modernized version of the definition found in some of our older treaties, including the 1954 Convention. The new definition is similar to the definition found in most of our recent conventions.

The term "permanent establishment" means "a fixed place of business through which a resident of a Contracting State engages in industrial or commercial activity". Illustrations of the concept of a fixed place of business include a branch, an office, a factory, a workshop, a warehouse, a place of extraction of natural resources, or a building site or construction or installation project which exists for more than 24 months. The construction project rule is a physical presence test under which the resident must be actively engaged in the project during the specified period. The time period has been expanded from the 12-month period used in the 1954 Convention in recognition of the changing nature of construction activity whereby a construction project may continue for more than 12 months and still maintain its essentially temporary nature. The 1954 Convention provided that an enterprise of one Contracting State had a permanent establishment in the other Contracting State if it carried on supervisory activities in the other State for more than 12 months in connection with a construction, installation, or assembly project located in the other State. The conduct of such supervisory activities has not been included in the illustrations of the concept of a fixed place of business in the new Convention. The determination of whether the conduct of supervisory activities constitutes a permanent establishment will be made upon the basis of the principles ordinarily used in making such a determination. As a general rule, any fixed facility through which an individual, corporation, or other person conducts industrial or commercial activity will be treated as a permanent establishment unless it falls in one of the specific exceptions described below.

This article specifically provides that a permanent establishment does not include a fixed place of business of a resident of one of the Contracting States which is located in the other Contracting State if it is used only for one or more of the following:

(1) the storage, display, or delivery of goods or merchandise belonging to the resident; (2) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display, or delivery;

(3) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;

(4) the purchase of goods or merchandise, or the collection of information, for the

resident; or

(5) advertising, the supply of information, the conduct of scientific research, or similar activities which have a preparatory or auxiliary character, for the resident.

These exceptions are cumulative and a site or facility used solely for one or more of these purposes will not be considered a permanent establishment. The exception for cases where goods of a resident are processed by another person includes cases where the resident furnishes the other person with the tools and dies necessary for the processing. Although no specific exception is made in the case of a building site or construction or installation project which exists for not more than 24 months, the Convention implies that such a site or project does not constitute a permanent establishment.

Notwithstanding the other provisions of this article, a person will be considered to have a permanent establishment if he engages in business through an agent, other than an independent agent, who has and regularly exercises authority to conclude contracts in the name of such person unless the agent only exercises such authority to purchase goods or merchandise.

The Convention also provides that a resident of one State will not be deemed to have a permanent establishment in the other State if such resident engages in industrial or commercial activity in such other State through an independent agent, such as a broker or general commission agent, if such agent is acting in the ordinary course of its business.

The determination of whether a resident of one State has a permanent establishment in the other State is to be made without regard to any control relationship between such resident and a resident of the other State or a person which engages in industrial or commercial activity in that other State (whether through a permanent establishment or otherwise).

Where it is necessary under the Convention to determine whether a permanent establishment exists in a third State, the standards of this article are to be applied. Such a determination may be necessary under paragraph (2) of Article 6 relating to the source of interest income.