Article 5 - PERMANENT ESTABLISEMENT

This Article defines the term "permanent establishment."

This definition is relevant under several articles of the Conven­

tion. The existence of a permanent establishment in a Contract­ ing State is necessary under Article 7 (Business Profits) for that State to tax the business profits of a resident of the other Contracting State. Because the term "fixed base" in Article 14 (Independent Personal Services) is understood by reference to the definition of "permanent establishment," Article 5 is also

relevant for purposes of Article 14. Articles 10, .11 and 12

(dealing with dividends, interest, and royalties, respectively)

provide rules limiting the source State's taxation of these items

of income when they are received by a resident of the other State
but only when such income is not attributable to a permanent

establishment or fixed base that the resident has or had in the

source State. Article 13 (Gains) permits the non-resident

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Contracting State to tax gains on the disposition of movable
property forming part of the business property of a permanent
establishment located in that State. Article 21 (Other Income)
permits the non-resident State to tax any item of income (except
income from immovable property) not dealt with elsewhere in the
Convention (including income from a third country), to the extent
it is attributable to a permanent establishment located in that
State.

   This Article is similar in many respects to the correspond­
ing articles in the OECD Model and in recent U.S. treaties. In
some important respects, however, it is patterned more closely
after the permanent establishment article in the U.N. Model.

   Paragraph 1

   Paragraph 1 provides the basic definition of the term
"permanent establishment." As used in the Convention, the term
means a fixed place of business through which the business of an
enterprise is wholly or partly carried on.

Paragraph 2

   Paragraph 2 contains a list of fixed places of business that
will constitute a permanent establishment. The list is illustra­
tive and non-exhaustive. According to paragraph 2, the term
permanent establishment includes a place of management, a branch,
an office, a factory, a workshop, and a mine, oil or gas well,
quarry or other place of extraction of natural resources. The
use of singular nouns in this illustrative list is not meant to
imply that each such place necessarily represents a separate
permanent establishment. In the case of mines or wells, for
example, several such places of business could constitute a
single permanent establishment if the project is a whole commer­
cially or geographically.

   A permanent establishment also includes a building site or a
construction, assembly or installation project, but only if the
site, project or activities continue for a period of more than
six months. The six-month test applies separately to each
individual site or project. The six-month period begins when

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work (including preparatory work carried on by the enterprise)
physically begins in a Contracting State. A site should not be
regarded as having ceased to exist when work is temporarily

discontinued. A series of contracts or projects that are inter­

dependent both commercially and geographically are to be treated
as a single project for purposes of applying the six-month
threshold test. For example, the construction of a housing
development would be considered a single project even if each
house in the development is constructed for a different purchas­
er. If the six-month threshold is exceeded, the site or project
constitutes a permanent establishment as of the first day that
the work in that State began. This interpretation of the Article
is based on the Commentaries to the corresponding provisions of
Article 5 of the OECD Model and therefore is the generally
accepted international interpretation of the language in para­

graph 2 of Article 5 of the Convention. Paragraph 3 of the OECD

Model contains language similar to that in subparagraph 2 g) of