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US Inbound: US permanent establishment issue

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-100Jim FullerForst-David-100David Forst

Jim Fuller ( and David Forst (
Fenwick & West

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