Digital permanent establishments - how effective are they?

In many cases, a source country would treat a fixed place of business or a PE as a taxable source of income.

Most double treaties include a business profits article which generally provides that business profits are only taxed in a jurisdiction where there is a permanent establishment. It then provides a definition of a PE that will override domestic law.

This is important as firstly not all countries apply a PE definition and may for instance just tax income that has a taxable source in their state. Under the domestic rules it would be taxable, but under the treaty if there was no PE then the income wouldn’t be taxable in the source country.

In terms of digital activity, the position relating to a PE is interesting.

In many cases, the provision of digital services in a jurisdiction does not give rise to a PE. This applies to the provision of digital goods remotely as well.

However, as, some jurisdictions have a concept of a digital PE.

Take for instance India. This applies a specific digital PE to try and tax foreign companies providing digital services in India.

It arises where:

• Aggregate payments for goods, services or property carried out by a non-Indian resident including the download of data or software in India, exceed INR 20 million.
• There is systematic and continuous soliciting of business activities or engaging with at least 300,000 users in India.

However, if you were tax resident in a country that had a double tax treaty with India, you’d look at the scope of tax on business profits and the definition of a PE article which would override the domestic tax treatment in India.

For example, Article 7 of the India - China treaty states:

‘The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State, but only so much of them as is attributable to that permanent establishment.’

As such, the digital PE itself would only be relevant either if you weren’t resident in a treaty jurisdiction or if the treaty did not apply to you.