Article 5. PERMA?\'ENT ESTABLISHMENT

This Article defines the term "permanent establishment. " The • existence of a permanent establishment is relevant under Article 8 (Busi• ness Profits) to the taxation of business profits and in determining the applicability of other provisions of the Convention.

Under paragraph (1 ), the ·:.,rm "permanent establishment" means a fixed place of busjness t),rough'«-'hich•a resident of one of the Contracting

States engages in a trade or business. ll ustrations in paragraph (2) of a permanent establishment include a seat of management; a branch; an office; a store or other sales outlet: a factory: a workshop: a warehouse: a mine, quarry or other place of extraction ot natural resources: a build· ing site or construction or assembly project or supervisory activities in connection therewith, provided the site, project, or activity continues !or a period of more than 183 days; and, the furnishing of services, including consultancy services, by a resident of one Contracting State through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contract• ing State for a period or periods aggregating more than 183 days. Under the building site or construction or assembly project or supervisory activities rule, the 183-day period begins only when work physically commences in the other Contracting State. For purposes of that rule, a series of contracts or projects which are interdependent both commercially and geographically is to be treated as a single project when applying the 183-day test. In that respect, it is similar to the furnishing services rule.

As a general rule, any fixed facility or premises through which a resident engages in a trade or business !or an indefinite or substantial period of time will be treated as a permanent establishment unless it is used only for one or more of the activities described in paragraph (3).

Paragraph (3) specifically 9rovides that a permanent establishment does not include a fixed place of business if it is used only tor one or more of the following:

(a) The use of facilities solely for the purpose of storage, display, or occasional delivery of. goods or merchan­ dise belonging to the resident;

(b) The maintenance of a stock of goods or merchan­ dise belonging to the resident solely for the purpose of storage, display, or occasional dt.,ivery:

(c) The maintenance of a stock of goods or merchan­ dise belonging to the resident solely for the purpose of processing by another person;

(d) The maintenance of a fixed place of business for

• the purpose of purchasing goods or merchandise, or for collect­ ing information, for the resident;

(el The maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a pre­ paratory or auxiliary character, for the resident; or

(f) The furnishing of ser· ²es, including the provision of equipment, in one of the Contrac .; States by a resident of the other Contracting State, including consultancy firms, in accordance with, or in the implementation of, an agreement between the Con­ tracting States regarding technical cooperation. Such an agreement was signed at Manila on April 27, 1951. See Economic and Techni­ cal Cooperation Agreement 'l\ith the Philippines, April 27, 1951, (1952) 3 U.S. T. 3707, T,I,A,S. 2498.

As noted, these exceptions are cumulative and a fixed place of business used only for one or more of these purposes will not be considered a permanent establishment under the Convention. It is intended that a building site or construction or assembly project or supervisory acti­ vities in connection therewith which does not exist for more than 183 days does not constitute a permanent establishment.

Under paragraph (4), a person acting in one Contracting State on behalf of a resident of the other Contracting State, other than an agent of an independent status to whom paragraph (5) applies, will be deemed to constitute a permanent establishment if such person has, and habitually exercises in that first-mentioned Contracting State, an authority to con­ clude contracts in the name of the resident, unless the exercise of the authority is limited to the purchase of goods or merchandise for the resident. Even if the person has no authority to conclude contracts in

the name of the resident, he will be deemed to constitute a permanent establishment if he habitually maimains in .the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods and merchandise on behalf of the resident. Similar rules appear

• in Code section 864(c)(5)(A).

01 the other hand, paragraph (5) provides that a resident of' one Con­ tracting State will not be deemed to have a permanent establishment in the other Contracting State merely because such resident carries on business in such other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business.

However, if the activities of the agent are devoted wholly or almost wholly on behalf of that resident and the transactions between the agent and the resident are not made under arm's length conditions, the agent will not be considered to be an agent o! independent status within the meaning of paragraph (5), Thus, for example, an agent will not lose his f!.tatus as an independent agent merely because he acts exclusively or almost exclusively for a resident of the other Contracting State, Nor will an agent lose his status as an independent agent merely because he enters into transactions with the resident under non-arm's length condi· tions. However, where both such conditions exist, the agent, in effe.ct, is no longer independent and paragraph (5) reflects that fact. Similar rules apply under Code section 864 (c)(5)(A)(ii), Regulations section 1. 864-7(d)(3)(iii) indicates that an otherwise independent agent who acts exclusively or almost exclusively for one foreign principal may not be considered to be an agent of independent status in appropriate circum·

stances,

Paragraph (6) provides that, except with respect to reinsurance, a resident of a Contracting State wil be deemed to have a permanent estab· lishment in the other Contracting State if it collects premiums in that

other Contracting State, or insures risks situated therein, through an employee or representative situated therein who is not an agent of independent status to whom paragraph (5) applies, A similar provision appears in the existing United States Convention _with France,

Paragraph (7) provides that a resident of one Contracting State shall not be deemed to have a permanent e-stablishment in the other Contract• ing State merely because such resident sells at the termination of a trade fair or convention in the other Contracting State goods or merchandise which were displayed by such resident at that trade fair or convention, The trade fair exception is not intended to apply with respect to other goods in the resident's inventory. This exception appears in recent United States conventions.

Under paragraph (8), the fact that a corporation of one of the Contract· ing States controls or is controlled by or is under common control with a corporation of the other Contracting State or a corporation which carries on business in that other Contracting State (whether through a permanent establishment or otherwise) will not be taken into account in determining whether the activities or fixed pla.ce of business of either corporation con• stitutes a permanent establishment of the ·other cor,poration.

Paragraph (9) provides that the principles set forth in this Article are to be applied in determining whether there is a permanent establish­ ment in a State other than one of the Contracting States or whether a person other than a resident of one of the Contracting States has a permanent establishment in one of the Contracting States. This is necessary for the proper application of paragraphs (2) and (3) of Article 4 (Source of Income). This paragraph is not intended to extend the benefits of the Convention to persons other than residents of the two Contracting States.