Permanent Establishment (PE) is a significant feature of bilateral tax treaties and is a key threshold adopted by source countries to tax profits earned by non-resident entities from the business activities carried out by the non-resident in the source country.
A ‘Fixed Place PE’ relates to a non-resident entity having a fixed place of business in the source country. But certain tax treaties also provide for a ‘Service PE’. A Service PE is established if: (i) the non-resident delivers services for longer than the prescribed threshold; and (ii) the said services are furnished in the source country through the employees or other personnel of the non-resident.
Traditionally, a Service PE required the physical presence of employees of the non-resident in the source country. However, in the present digital economy, this understanding is being challenged as more and more jurisdictions are doing away with this requirement.
The governments of Saudi Arabia and Israel, for example, have passed internal guidelines that suggest a non-resident would have a Service PE if it furnished services, including consultancy services, through employees or other personnel who are offshore and not physically present in the Source State. This would only be the case, however, if the activities continue (for the same or connected projects) within the Source State for more than 183 days in any 12-month period.Continue Reading Service PE Does Not Require Physical Presence of Employees