Permanent
Establishments
Treaty Definition
Under the US-Canada tax treaty, a permanent establishment
may arise from a fixed place of business in the United
States or certain activities of a foreign person’s
agent in the United States.
Fixed Place of Business
The
Canada-US tax treaty defines “permanent establishment” as “a
fixed place of business through which the business of an
enterprise is wholly or partly carried on.” The treaty
usually provides a list of fixed places of businesses, which
generally include a place of management, a branch, an office,
a factory, a workshop, a mine, an oil or gas well, a quarry,
or any other place of extraction of natural resources.
Agency
A
foreign person may create a permanent establishment in
the United
States through the activities of a dependent agent
acting on such foreign person’s behalf in the United
States. Where the agency rules apply to create a permanent
establishment in the United States, a fixed place of business
in the United States need not exist. Under the Canada/US
tax treaty, a person acting on behalf of a foreign person,
other than an independent agent, will create a permanent
establishment in the United States if the person has, and
habitually exercises in the United States, the authority
to conclude contracts in the name of the foreign person.
A foreign person will not be deemed to have a permanent establishment
in the United States merely because such foreign person carries
on business in the United States through a broker, general
commission agent or any other agent of an independent status,
provided that such agent is acting in the ordinary course
of business.
The US-Canada treaty contains exceptions to the general
rule that a fixed place of business constitutes a permanent
establishment. Article V, paragraph 6 states:
Notwithstanding
the provisions of paragraph 1, 2 and 5, the term “permanent establishment” shall
be deemed not to include a fixed place of business used
solely for,
or a person referred to in paragraph 5 engaged solely in,
one or more of the following activities:
- the
use of facilities solely for the purpose of storage,
display, or delivery of goods or merchandise belonging
to the resident;
- the
maintenance of a stock of goods or merchandise belonging
to the resident solely for the purpose of storage,
display, or delivery;
- the
maintenance of a stock of goods or merchandise belonging
to the resident solely for the purpose of processing
by another person;
- the
purchase of goods or merchandise, or the collection of
information, for the resident; and
- advertising,
the supply of information, scientific research, or similar
activities which have a preparatory or auxiliary
character for the resident.
In
addition to the specific activities identified in subparagraphs
(a) through (e), paragraph 6 provides that a permanent
establishment
is deemed not to include “similar activities which
have a preparatory or auxiliary character”. It is possible for a US trade or business, as defined in
IRC section 864, to not be a permanent establishment. If
a Canadian corporation is deemed to have a permanent establishment
in the United States under the US/Canada Income Tax Treaty,
all profits of the Canadian corporation attributable to the
permanent establishment probably would be subject to US tax.
Operating in the US as a Permanent Establishment
A foreign corporation operating in the US through a branch
generally is entitled to the same deductions as domestic
corporations. However, in computing taxable income, a foreign
corporation is allowed deductions only to the extent that
they are connected to income effectively connected with
the conduct of a trade or business in the United States.
Regulations set forth detailed rules for the allocation
and apportionment of interest expense and other deductions
to effectively connected income and to other income.
Credits and deductions are allowable to a corporation
only if it files a US corporation income tax return.
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information contained herein is of a general nature and
is not intended to address the circumstances of any particular individual
or entity. Although we endeavor to provide accurate and
timely information, there can be no guarantee that such information
is accurate as of the date it is received or that it
will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough
examination
of the particular situation.
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© 2006 KPMG LLP, the
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