Article 4. PERMANENT ESTAB­

LISHMENT

This article defines the term “per­

manent establishment.” The existence of a permanent establishment is, under the terms of the proposed Con­ vention, a prerequisite for one State to tax the industrial or commercial prof­ its of a resident of the other State. The concept is also significant in de­ termining the applicability of other provisions of the proposed Conven­ tion, such as Article 8 (Dividends), Article 9 (Interest), Article 10 (Roy­ alties), and Article 12 (Capital Gains). The definition of “permanent establishment” is a modernized ver­ sion of the definition found in some of our older treaties, including the 1949 Convention with Norway. The new definition is similar to the definition found in our French and Belgian Conventions.

The term “permanent establish­ ment” means “a fixed place of busi­ ness through which a resident of one of the Contracting States engages in industrial or commercial activity.” Il­ lustrations of the concept of a fixed place of business include a branch, an office, a factory, a workshop, a ware­ house, a place of extraction of natural resources, or a building site or con­ struction or installation project which exists for more than 12 months. The construction project rule is a physical presence test under which the resident must be actively engaged in the proj­ ect during the 12-month period. As a general rule, any fixed facility through which an individual, corporation, or other person conducts industrial or commercial activity will be treated as its permanent establishment unless it falls in one of the specific exceptions described below. Our recent treaties have included a “seat of manage­ ment” as an illustration of a fixed place of business.

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 use of facilities for the storage, dis­

play, or delivery of goods or merchan­ dise 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 belong­ ing to the resident for the purpose of processing by another person; (4) the maintenance of a fixed place of busi­ ness for the purpose of purchasing goods or merchandise, or the collect­ ing of information, for the resident;

(5) the maintenance of a fixed place of business for the purpose of advertis­ ing, for the supply of information, for scientific research, or for similar activ­ ities which have a preparatory or aux­ iliary character, for the resident; or

(6) the maintenance of a building site or construction or installation project which does not exist for more than 12 months. The building site or construc­ tion or installation project exception is merely a clarification of the rule that such an activity for more than 12 months is a permanent establishment and, accordingly, such an activity for

12 months or less is not a permanent establishment. These exceptions are cumulative and a site or facility used solely for one or more of these pur­ poses will not be considered a perma­ nent establishment under the pro­ posed Convention. 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.

Notwithstanding the other provi­ sions of this article a person will be considered to have a permanent estab­ lishment if he engages in business through an agent, other than an inde­ pendent agent, who either has and regularly exercises authority to con­ clude contracts in the name of such person unless the agent only exercises such authority to purchase goods or merchandise, or who maintains sub­ stantial equipment or machinery for more than 12 months.

With respect to an independent

agent, the proposed Convention also provides that a resident of one State will not be deemed to have a perma­ nent 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 commis­ sion 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 con­ trol relationship of such resident with respect to a resident of the other State or with respect to a person which en­ gages in industrial or commercial ac­ tivity in that other State (whether through a permanent establishment or otherwise).

Although this article is generally drafted with reference to a resident of one of the States engaging in in­ dustrial or commercial activity in the other State, for certain purposes the proposed Convention deals with a nonresident engaging in industrial or commercial activity in one of the States or a resident of one of the States engaging in industrial or com­ mercial activity in a third State. For these purposes, the principles set forth in this article are to be applied in de­ termining whether there is a perma­ nent establishment.