Spring 2012 issue of Horizons

- A branch sales office where employees conclude sales contracts in U.S. company’s name does create a permanent establishment (U.S. Model, Art. 5(1), (2) and (5)). 4. U.S. company organizes a subsidiary in a foreign treaty jurisdiction that operates as a buy-sell distributor for U.S. company’s products. - Mere ownership of foreign subsidiary does not create a permanent establishment for the U.S. parent. The foreign country would likely tax the subsidiary’s profits, however. (U.S. Model, Art. 5(7)). A permanent establishment is an important concept for your business because this is the first step in determining whether you may have an income tax filing requirements and payment obligations in a foreign jurisdiction. Expanded Foreign Activities If you find that you conduct more extensive business outside the U.S. that is not covered by the permanent establishment protections of treaties, it will be necessary to evaluate your tax status in the foreign jurisdiction. Operation as a Foreign Branch When operations of a U.S. entity exceed certain thresholds, the U.S. entity will be taxed in a foreign jurisdiction as a branch operation. This taxation can be in the form of withholding taxes or income taxes. It may be necessary to register the branch in the foreign location and obtain any local permits to do business. A branch operation generally allows for easier flow of funds, including payment of local country expenses and remittance of the profits back to the U.S. In certain countries, care must be given to the movement of cash across borders. Operation as a Foreign Subsidiary When operations in a foreign jurisdiction take a more expanded role, it may be necessary to incorporate in that foreign jurisdiction.

imposed by foreign countries may be entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries. The U.S. has income tax treaties with more than 60 countries, including virtually all of Europe and most other major trading partners, including Canada, Mexico, China and Australia. Permanent Establishment One of the most important advantages of an income tax treaty is the concept of permanent establishment. By defining a permanent establishment with our treaty partners, the U.S. is able to provide guidance to businesses as to how and when they create “nexus” or permanent establishment in a foreign jurisdiction. The permanent establishment provisions in treaties provide that certain activities will create a permanent establishment. Alternatively, these provisions provide that certain limited activities will not create a permanent establishment.

Some examples related to permanent establishment include:

1. U.S. company uses independent commission agents to sell goods in a foreign treaty jurisdiction. - Selling products solely through an

independent commission agent does not create a permanent establishment. (U.S. Model, Art 5(6))

2. U.S. company establishes a liaison office in a foreign treaty jurisdiction to handle advertising, collect information, and display U.S. company’s products. - Although it is a fixed place of business, the office does not create a permanent establishment as long as U.S. company’s employees limit their activities to auxiliary or preparatory activities, with sales concluded abroad (U.S. Model, Art. 5(4)). 3. U.S. company establishes a sales office in a foreign treaty jurisdiction that solicits sales and negotiates and concludes sales agreements.

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