OCSE, on March 22, 2018, by the Report titled “Additional Guidance on the Attribution of Profits to Permanent Establishments”, introduced new rules to attribute profits to permanent establishments. In particular, the afore mentioned document has updated the meaning of permanent establishment providing new elements to identify her. In fact, with the amendments done articles 5 paragraphs 4,5 and 6 of the OCSE Model 2017, OCSE focused on two particulars cases in which the permanent establishment may occur, i.e.:
- The concept of anti-fragmentation rule (paragraph 4.1)
- The definition of related intermediary and independent agent (paragraphs 5 and 6).
For what concerns the regulation regarding anti-fragmentation rule, OCSE released rules in order to counter the artificial fragmentation of the activities, as to say that might be viewed in isolation as preparatory or auxiliary in nature but that constitute part of a larger set of business activities conducted in the source country by the enterprise (whether alone or with a closely related enterprise) if the combined activities “constitute complementary functions that are part of a cohesive business operation”. This may occur in the following cases:
- where the non-resident enterprise or a closely related enterprise already has a PE in the source country, and the activities in question constitute complementary functions that are part of a cohesive business operation (“part of a cohesive business operation”);
- where there is no pre-existing PE but the combination of activities in the source country by the non-resident enterprise and closely related non-resident enterprises results in a cohesive business operation that is not merely preparatory or auxiliary in nature.
The OCSE report refers to the example of Online Co. a company that sells goods through an online platform: the company purchases goods from third parties and re-sell them to final costumers that are in another Country, using a warehouse and an own office in such Country. The example states that the warehouse is staffed by 25 employees, which are responsible for the temporary storage of the goods and for the deliveries, while the office, far from the warehouse, is staffed by 15 employees, which are responsible for the merchandising. In this situation, on the basis of the provisions of the new OCSE guidance, two permanent establishments of the foreign company occur: the warehouse and the office; as the activity complexity carried out is only one and is not preparatory or ancillary. For what concerns the attribution of the profits to the permanent establishment we refer to the principal concept contained in article 7, paragraph 2 of the OCSE Model, under which it is necessary to consider the permanent establishment as a separate and independent enterprises for what concerns the execution of the activities. Therefore, in the afore mentioned example, both permanent establishments (ex warehouse and ex office) shall be attributed an income equal to the price that the company Online Co. would have derived if it were a separate and independent enterprises performing the same storage and delivery services and for merchandising.
Definition of related intermediary and independent agent
With reference to the related intermediary, the new OCSE guidance includes in the definition of permanent establishment the related intermediary that not only concludes the contracts in the name of the non- resident enterprise but habitually has a main role in the execution of contracts that are then “finalized” by the mother company with no particular amendments. The conditions required by the new paragraph 5, in order to be considered a permanent establishment, are not met in case the activities carried out by the intermediary are included his ordinary activity. In this last case, it is an independent agent. The amendments made to paragraph 6 set then a limit in the concept of independency, as they consider as no meeting the conditions those agents that exclusively, or almost exclusively, act on behalf of one or more closely related enterprises.
In all cases of related intermediary, the rights and duties deriving from the contracts are considered attributable to the agent, as permanent establishment. This does not anyway mean that the whole profit of the transaction is given to the agent, as it is necessary to refer to the criteria contained in article 7, paragraph 2, of the OCSE Model, under which the profits attributable to the permanent establishment are those that permanent establishment would have derived if it were a separate and independent enterprise performing the same activities.