US Inbound: US permanent establishment issue

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US Inbound: US permanent establishment issue

intl-updates-small.jpg

There has been a lot of discussion in the past few years regarding the BEPS changes and what constitutes a permanent establishment (PE) by a multinational corporation (X) based in one country (A) that has a presence or activity in another country (B).

The BEPS changes obviously are important and their implementation by a number of countries (excluding the US) under the Multilateral Instrument can materially affect multinational corporations' strategies and structures for years to come. These changes will give rise to important questions regarding what an employee or agent of X can safely do in country B in trying to sell X's goods or services, and whether the unintentional fragmentation of activities can create a PE of X in country B, etc.

Multinational corporations' tax personnel undoubtedly will be called upon to provide operating guidelines for the company's international sales personnel whose very livelihood and compensation are dependent on selling the company's goods or services in other countries, not in placating a bunch of tax planners. Drafting this guidance will not necessarily be easy.

It will be important in designing these operating guidelines to remember the old, long-standing rules as well as the new rules. A PE, on the bottom line, is a "fixed place of business" through which a company like X conducts a trade or business in another country.

The "fixed place" concept can give rise to a number of issues. For example, X likely has employees or agents who travel to country B and other countries on sales missions, conducting both supervisory and real-time selling activities. Where do they stay and where do they work while in country B? Do they stay in hotels provided by X or X's country B subsidiary? Do they work in designated offices provided by X or X's country B subsidiary?

A recent US Tax Court case provided some potentially helpful guidance on these matters even though it did not involve treaty or PE issues.

In Acone v. Commissioner, T.C. Memo. 2017-162, T.C.M. (August 22 2017), the Tax Court addressed the tax rules for US persons resident abroad, an issue not relevant to this column. The court had to address an issue involving the permanence of the taxpayer's foreign presence and whether it rose to the level of an "abode" in the foreign country involved (South Korea).

The Tax Court stated that a taxpayer's abode implies stability, not transience. The taxpayer's housing in South Korea was a hotel. The court stated that a hotel is the quintessence of transience and that the taxpayer did not even have a particular hotel room to call his own. He stayed in whatever room happened to be vacant when he checked in. He was part of the perpetual stream of South Korean hotel guests coming and going. The taxpayer stayed there only when his work required it.

Acone supports the notion that travelling sales persons or other executives registering as hotel guests and using whatever room is available (or registering in different hotels during different visits) would be the "quintessence of transience", i.e. the opposite of having a "permanent" establishment. While this might seem intuitively clear without the need for case guidance, Acone is now a judicial decision so holding. On the other hand, staying in the same, designated hotel room on each trip, while not necessarily an indicia of permanence for PE purposes, would not be as helpful.

The same conclusions might be applicable in considering the office out of which the travelling salesperson or other executive works. Does he have an office in the country B subsidiary's office building designated only for him with his name on the door? Or does he work in whatever empty office is available while he's in country B?

Fuller-James-P-100

Jim Fuller

 

Forst-David-100

David Forst

Jim Fuller (jpfuller@fenwick.com) and David Forst (dforst@fenwick.com)

Fenwick & West

Website: www.fenwick.com

more across site & shared bottom lb ros

More from across our site

Wim Wuyts, who had been head of the specialist tax network since 2017, is moving on to a new role with WTS’s Belgian member firm
MNEs are increasingly using algorithmic tools in TP. Sahasranshu Dash argues that data ethics should therefore plug directly into the TP design process
The Institute of Chartered Accountants in England and Wales also queried whether HMRC resources could be better spent scrutinising larger entities
Grant Thornton’s Austria tax head likens his practice to an escape room, shares his football coaching ambitions, and explains why tax is cool
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 EMEA Tax Awards
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 Asia-Pacific Tax Awards
The fates of pillars one and two hang in the balance after the US successfully threw its weight around in G7 and Canadian negotiations
Rafael Tena tells ITR about the ‘crazy’ Mexican market, ditching the hourly rate, and refusing to grow his fledgling firm in an ‘unstructured way’
It should be easy for advisers to be transparent about costs, Brown Rudnick partner Matthew Sharp said in response to exclusive ITR in-house data
The sprawling legislation phases out Joe Biden-era green tax incentives for businesses; in other news, the UK will reportedly maintain its DST despite US pressure
Gift this article