ARTICLE 9. PERMANENT ESTABLISHMENT — U.S. Income Tax Treaty

This Article defines the term 'permanent establishment." The existence of a permanent establishment is, under the terms of the proposed Convention, a pre

requisite for one State to tax the industrial or commercial profits of a resident

BELGIUM 398

of the other State. The concept is also significant in determining the applicability

of other provisions of the Convention, such as Article 12 (Dividends), Article 13

(Interest), and Article 14 (Royalties). The definition of "permanent establish ment" is a modernized version of the definition found in some of our older treaties. The new definition is similar to the definition found in our French Convention.

The term "permanent establishment" means "a fixed place of business through which a resident of one of the Contracting States engages in industrial or com mercial activity." Illustrations of the concept of a fixed place of business include a seat of management, an office, a store or other sales outlet, a workshop, a fac tory, a warehouse, a place of extraction of natural resources, or a building, con struction, or installation project which is used for such purpose for 6 months or more. As a general rule, any fixed facility through which an individual, corpora tion 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. The proposed Convention uses the term "a seat of management" which was the term used in our Convention with France. The technical explana tion of our French Convention explains the definition of the term "a seat of man agement" and its difference in meaning !rom the term "a place of management" as follows:

It should be noted that this convention uses the term "seat of management" where the OECD model convention and prior agreements to which the United -States is a party used the term "place of management"; both terms ^are trans

lations of the French term "un siege de direction" and it is believed the translation found in this convention is the more accurate. Prior agreements in which the term "place of management" appears will be interpreted there fore as if the words "seat of management" had been used. That explanation is applicable to the proposed Trinidad and Tobago Convention.

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 lodated in the other Contracting State if it is used only for one or more of the following:

(a) the processing by another person, whether related or unrelated. under arrangements or conditions which are or would be made between independ ent persons, of goods or merchandise belonging to the resident;

(b) the purchase, under arrangements or conditions which are or would be made between independent persons, of goods or merchandise for the ac count of the resident;

(c) the storage and/or delivery of goods belonging to the resident, (other than goods or merchandise held for sale by such resident in a store or other sales outlet);

(d) the collection of information for the resident; (e) advertising, the conduct of scientific research, the display of goods or merchandise, or the supply of Information, if such activities have a prepara tory and auxiliary character in the trade or business of the resident; or

(f) construction, assembly, or Installation projects If the site or facilities are used for such purposes for less than 6 months. These exceptions are cumulative and a site or facility used solely for more than one of these purposes will not be considered a permanent establishment under the proposed Convention. The construction project rule is a physical test under which the resident must be actively engaged in the project during the specifled period.

Notwithstanding the other provisions of this Article, a person will be con sidered to have a permanent establishment If he engages in business through

an agent, other than an independent agent, who has and regularly exercises au thority to conclude contracts In the name of such person unless the agent only

exercises such authority to purchase goods or merchandise. The proposed Conven tion further provides that a resident of one State will be considered to have a permanent establishment in the other State if such resident engages in business in sucb other State through a person, who maintains in that other State, a stock of goods or merchandise belonging to such resident from which such person regu larly fills orders or makes deliveries. A resident of one State will also be con sidered to have a permanent establishment in the other State if such resident maintains equipment or machinery for rental or other purposes within that other . State for a period of 6 months or more.

With respect to an independent agent, the proposed Convention also provides that a resident of one State will not be deemed to have a permanent establish

BELGIUM 399

ment 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 his business.

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

The Article provides that a resident of one of the States has a permanent establishment in the other State if it sells in that other State goods or merchan dise that are either (1) subjected to substantial processing in that other State

(whether or not purchased in the other State) or (2) purchased in that other State and such goods or merchandise are not subjected to substantial processing outside the other State. Under this rule, which is similar to the rule contained In the proposed Belgian Convention the taxpayer will have a permanent estab lishment whether or not he maintains a sales office In the other State. Thus, where an independent agent acting for a United States corporation arranges for the sale of goods in Trinidad and Tobago, the United States corporation will nevertheless be deemed to have a permanent establishment in Trinidad and Tobago where those goods were purchased in Trinidad and Tobago for that

corporation by the agent (or by any other person) and then resold by the corporation without having been subjected to processing outside Trinidad and

Tobago prior to such resale. With respect to a United States corporation selling goods purchased outside Trinidad and Tobago (or produced outside Trinidad and Tobago), their resale (or sale) in Trinidad and Tobago will of itself give rise to a permanent establishment only if these goods are subjected to substantial processing In Trinidad and Tobago.

If a resident of one State maintains a permanent establishment in the other State at any time during the taxable year, the permanent establishment will be considered to have existed for the entire taxable year.