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Permanent establishments: GloBE definition

Applies
FY2024 onwards
Reviewed
Rule
P2-PE-2024.1
By

What is a permanent establishment under the GloBE Rules?

A treaty PE, a place taxed on a net basis under local law, a deemed treaty PE where there is no income tax, or one whose income is exempt at home.

Per GloBE Model Rules (Pillar Two), December 2021, Article 10.1, definition of Permanent Establishment

A Permanent Establishment is: a place of business situated in a jurisdiction and treated as a permanent establishment under an applicable Tax Treaty in force, provided the jurisdiction taxes the income attributable to it under a provision similar to Article 7 of the OECD Model Tax Convention; if there is no applicable Tax Treaty, a place of business in respect of which a jurisdiction taxes under its domestic law the income attributable to it on a net basis similar to the manner in which it taxes its own residents; if a jurisdiction has no corporate income tax system, a place of business that would be treated as a permanent establishment under the OECD Model, provided the jurisdiction would have had the right to tax the income attributable to it under Article 7; or a place of business not already described through which operations are conducted outside the jurisdiction where the Entity is located, provided that jurisdiction exempts the income attributable to such operations.

A Permanent Establishment is a Constituent Entity separate from its Main Entity, with its own income, taxes and location. The route taken decides how its income is attributed and whether it is located in a jurisdiction or stateless.

The routes open in a fixed order

The four routes

  • (a) A treaty permanent establishment, taxed under an Article 7-type provision
  • (b) No treaty: taxed under domestic law on a net basis, as residents are
  • (c) No corporate income tax: would be a permanent establishment under the OECD Model
  • (d) None of those: operations outside the Entity's jurisdiction, which exempts the income — a stateless Permanent Establishment

A treaty permanent establishment is not always one here

Under (a) the source jurisdiction must actually tax the attributable income under an Article 7-type provision. An airline's or shipping line's office that the treaty prevents the source state from taxing is not a Permanent Establishment under this route.

Gross-basis tax is not enough

Under (b) the income must be taxed on a net basis similar to how residents are taxed. A withholding tax on gross payments does not make a Permanent Establishment.

Route (d) looks at the other jurisdiction

It turns on whether the Entity's own jurisdiction exempts the income of the operations, not on anything the source state does.

A definition of its own

It applies only for the GloBE Rules. It does not affect the meaning of the term in a tax treaty, in domestic law or for Country-by-Country Reporting.

Order of testing

  1. 1

    Inputs requiring your determination

    Every input the computation reaches must be supplied; nil is entered, not left blank.

  2. 2

    Paragraph (a) — an applicable Tax Treaty

    A treaty permanent establishment, taxed under an Article 7-type provision.

  3. 3

    Paragraph (b) — domestic law, with no treaty

    Net-basis taxation similar to residents.

  4. 4

    Paragraph (c) — a jurisdiction with no corporate income tax

    A hypothetical test against the OECD Model.

  5. 5

    Paragraph (d) — operations exempted by the Entity's own jurisdiction

    A stateless Permanent Establishment.

  6. 6

    The four routes of the definition

    A place of business within none of them is not a Permanent Establishment.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

A branch under a treaty

A sales branch treated as a permanent establishment under the treaty and taxed on its attributable profits.

Computed

The place of business is a Permanent Establishment for the GloBE Rules as computed, under paragraph (a) of the definition: it is treated as a permanent establishment under an applicable Tax Treaty in force, and the jurisdiction taxes the income attributable to it under a provision similar to Article 7 of the OECD Model. It is a Constituent Entity separate from its Main Entity and is located in the jurisdiction where it is situated (Article 10.3.3(a)). Its income is the amount attributable to it under the treaty (Article 3.4.2(a)). Based on what you supplied.

Decided by the paragraph (a) — an applicable tax treaty

An airline's ticket office

A treaty permanent establishment whose profits the source state cannot tax, in a group whose home jurisdiction taxes them.

Computed

The place of business is not a Permanent Establishment for the GloBE Rules as computed: the treaty treats it as a permanent establishment but the source jurisdiction does not tax its income under a provision similar to Article 7, and the Entity's own jurisdiction does not exempt the income attributable to the operations, so paragraph (d) does not apply either. Its income and taxes stay with the Entity. This says nothing about the position under a tax treaty or domestic law, for which the GloBE definition is not used. Based on what you supplied.

Decided by the four routes of the definition

A site in a jurisdiction with no corporate income tax

No treaty and no corporate income tax; the site would be a permanent establishment under the OECD Model.

Computed

The place of business is a Permanent Establishment for the GloBE Rules as computed, under paragraph (c) of the definition: the jurisdiction has no corporate income tax system, and the place of business would be a permanent establishment under the OECD Model with a right to tax under Article 7. It is a Constituent Entity separate from its Main Entity and is located in the jurisdiction where it is situated (Article 10.3.3(a)). Its income is the amount that would have been attributed to it under Article 7 of the OECD Model (Article 3.4.2(b)). Based on what you supplied.

Decided by the paragraph (c) — a jurisdiction with no corporate income tax

Exempt offshore operations

Operations abroad that no treaty treats as a permanent establishment, whose income the home jurisdiction exempts.

Computed

The place of business is a Permanent Establishment for the GloBE Rules as computed, under paragraph (d) of the definition: a Tax Treaty applies and does not treat it as a permanent establishment, but operations are conducted through it outside the jurisdiction where the Entity is located and that jurisdiction exempts the income attributable to them. It is a Stateless Constituent Entity (Article 10.3.3(b)), with its Effective Tax Rate computed on its own; its income is the income so exempted, less the expenses not deducted there (Article 3.4.3). Based on what you supplied.

Decided by the paragraph (d) — operations exempted by the entity's own jurisdiction

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

1 input still need your determination:

  • Is there an applicable Tax Treaty between the Entity's jurisdiction and the jurisdiction of the place of business that is in force and has come into effect for the tax in question?

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

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Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader