Permanent Establishment in a Digital Perspective

Evgeni Petterson

Student thesis: Master thesis


This master thesis aims to analyse the impact of the digital economy and its digital companies on the concept of a permanent establishment. The key element for allocating taxation rights regarding business income is resting on the concept of a permanent establishment. For more than a century this concept has been based on a “fixed to the ground” idea. Traditionally international businesses that engaged in cross borders transactions were certain to have some kind of fixed psychical presence in the source state. The allocation of taxing rights could therefore be restricted to such a presence. However, the emergence of the digital era or so-called digital economy has fundamentally disrupted consumer behaviour and revolutionized the way businesses engage in cross-border trade. New technologies allow digital businesses to engage in economic activities in cross border countries without having a psychical presence. Therefore, digital businesses like Amazon, Google, and Zalando can be economically engaged in countries without having a taxable presence due to their lack of being “fixed to the ground”. This thesis will analyse the digital companies, its unique business models and the current rules for constituting a permanent establishment. On this basis, the thesis will analyse how the current concept of a permanent establishment can be applied on the digital companies. Subsequently the thesis will analyse how a modified concept of a permanent establishment can be used to tax digital companies. Furthermore, this thesis has shown that in theory the current permanent establishment rules can apply to digital companies. That is because the OECD Model Convention and its commentaries, states that the use of servers, software and warehouses can constitute a permanent establishment. However, the OECD Model Convention poses many different conditions that must be met before these elements can be contemplated as a permanent establishment. This represents an inconvenience because digital companies can execute their business models in a particular way, thereby a permanent establishment can be avoided. Therefore, the analysis states, that there is a significant issue in relation to the current permanent establishment definition which needs to be addressed. The analysis emphasizes the importance of an approach where the concept of a permanent business is not based solely on a physical presence. This is explained by the fact that the concept of a physical presence is obsolete and will become increasingly more challenging to apply as more companies are becoming digital. Meanwhile the OECD and EU have recognised this weakness and states, that the current permanent establishment rules create opportunities for tax avoidance and that a revision of the exiting definition of a permanent establishment must be made to ensure a fair allocation of taxation rights in the digital economy. To ensure a taxable nexus. New proposal has been made based on a concept of a digital presence. The thesis has analysed these proposals made by the EU commission and the OECD. The analysis showed, that the EU proposal was partially interesting. The EU proposal can potentially address the highly digitalized companies and ensures that this type of company will have a taxable presence in the sources state, within the European Union. However, the analysis also showed that this proposal cannot solve all challenges the digital companies have to offer. This is mainly because some types of digital companies are still not addressed in this proposal. These companies can therefore still pose a great challenge. Nonetheless, the EU proposal is still a very ambitious approach to modernize the existing permanent establishment rules that potentially can bring them into the new digital age. The proposal can therefore serve as a source of inspiration for new tax legislation

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2020
Number of pages79