Permanent Establishment – with Focus on the Delimitation of the Business of an Enterprise

Nana Nielsen

Student thesis: Master executive thesis


The overall purpose of this thesis is to do an analysis of the definition of Permanent Establishment (PE) in article 5 of the OECD Model Tax Convention. First off, the analysis will be based on the Model Tax Convention of 2014, since this is the version implemented into the double tax conventions (DTC’s) that Denmark have agreed on with other states. The analysis will focus on article 5, paragraph 4, that includes the delimitation of the business of an enterprise. The paragraph states that a PE will not be established if the activities can be characterized as preparatory or auxiliary. In paragraph 4 a number of activities are explicitly mentioned – meaning that these types of activities will in no case lead to a PE even though they might be of substantial nature and might not in themselves be considered as preparatory or auxiliary. The definition of a PE has been steady for a number of years. Changes of the article have therefore been suggested by OECD/G20 in the Base Erosion and Profit Shifting (BEPS) project leading to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MLI has been implemented into a new Model Tax Convention (version 2017) that changes the article in a significant manner. By introducing a revised article 5, paragraph 4, the primary focus is to substantially reduce base erosion and profit shifting. First of all, the changes of the paragraph leads to a situation where the delimitation mentioned in the article will only be applicable in regards to activities that are actually of preparatory or auxiliary nature. Secondly, the changes include an anti-fragmentation rule that prevents enterprises from fragmenting their business and argue that the individual activity does not constitute a PE. Since the changes have not yet been implemented into the Danish DTC’s, they do not have direct legal effect yet. Nevertheless, the authorities might already at this point use them in terms of interpretation of the current DTC’s since they represent the general international focus on the right to taxate in the state of source. As the changes are implemented into the Danish DTC’s they will have direct legal effect. The extent of this effect is, however, very difficult to foresee, since the changes in article 5, paragraph 4 have not been clarified sufficiently directly in the article nor in the commentaries.

EducationsMaster i Skat, (Executive Master Programme) Final Thesis
Publication date2018
Number of pages60