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In order to determine whether or not a PE exists, Article 5 provides the relevant definitions and exceptions
for such identification. In this regard, a distinction has to be made between cases with a:
- Fixed places of establishment; and
o These will be regulated by the general rule of PARA 1 (definition of PE) and PARA 4 (exception for
preparatory and auxiliary activities) and 4(1) (limitation to the exception of PARA 4).
- Without a fixed place of establishment
o These are addressed by PARA 5 (agency PE) and PARA 6 (independent agent exception)
Existence of a ‘fixed place of establishment ’:
STEP 1: assess whether there is a PE under Art. 5(1)(2)(3)!!
In cases where a fixed place of establishment is present, the general rule (Article 5(1)(2)(3) OECD
MC) has to be taken into consideration to determine whether a PE exists (SEE NOTES WEEK 4).
PARAGRAPH 4: RESTRICTIONS ON THE DEFINITION
o Article 5(4) -> narrows the scope of the definition of “permanent establishment” in article 5(1) by
deeming that a PE does not include a number of preparatory or auxiliary activities (ph 58)
IMPORTANT: ‘Shall be deemed’ -> PARA. 4 refers to the concept ‘shall be deemed’ this means that the
PE will then be considered not to exist. Hence, ALWAYS ANALYSE PARA.1 BEFORE ANALYSING PARA. 4!!
2 conditions must be met for the application of PARA 4:
1) Activity is carried out ‘for the enterprise’ or goods/merchandise ‘must belong to the
enterprise’ (para. 61)
the activity must be carried on for the enterprise, or, in the case of goods or merchandise
used for storage, display, delivery or processing, the goods or merchandise must belong to
the enterprise (Such activities carried on for other enterprises are not preparatory or
auxiliary)
if the activities are carried on for another enterprise or the goods or merchandise are
owned by another enterprise while they are still located at the fixed place, the
exceptions in article 5(4) of the OECD Model do not apply (para 61 and 65)
2) the fixed place of business must either be used solely for carrying on a single activity, or the
overall activity resulting from a combination of two or more activities carried on through the
same fixed place of business must be of a preparatory or auxiliary character
How to determine whether activities are preparatory or auxiliary?
o The decisive criterion is whether or not the activity of the fixed place of business in
itself forms an essential and significant part of the activity of the enterprise as a whole
(para 59) -> determined on a case-by-case
, Preparatory activities -> one that is carried on in contemplation of the carrying on of
what constitutes the essential and significant part of the activity of the enterprise as
a whole (para 60)
Auxiliary activities -> an activity that is carried on to support, without being part of,
the essential and significant part of the activity of the enterprise as a whole (para 60
o An activity that is not described in subparagraphs a) to d) may still be excluded under the
general exceptions in subparagraph e) if the activity is of a preparatory or auxiliary
character (para 70) or under subparagraph f) if a combination of the activities specified in
subparagraphs a) to e) is of a preparatory or auxiliary character (para 78)
Paragraphs a) to e):
o Look at the paragraph a) to e) to determine which apply and whether (according to the
Commentaries) they fall under the exception to PARA 1 or not.
o Para a)
‘Amazon’ rule -> the facilities form part of the income earning activity and cannot be
deemed to merely be of preparatory or auxiliary nature -> they form an essential
part of the business. NO PARA 4!
PARAGRAPH 4(1): ANTI-FRAGMENTATION PROVISION:
o PARA 4(1) -> is intended to prevent an enterprise or a group of closely related enterprises from
fragmenting a cohesive business operation into several small operations in order to argue that each is
merely engaged in a preparatory or auxiliary activity.
Applicability of PARA 4(1):
o Applies ONLY if:
- one of the fixed places of business where the enterprise or the closely related enterprise (see
PARA. 8 for definition) carries on business in the country constitutes a PE, OR
- the combination of activities of the enterprise and the closely related enterprise goes beyond
preparatory or auxiliary activities (para 79)
If this is fulfilled, and:
- If the activities carried on at that place and other activities of the same enterprise or of closely
related enterprises exercised at that place or at another place in the same State constitute
complementary functions that are part of a cohesive business operation (para 79)
Then the exceptions provided for by PARA 4 do NOT apply.
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