Risks of a Permanent Establishment in India and how can you avoid them

/Risks of a Permanent Establishment in India and how can you avoid them
  • permanent establishment in India

What are the risks of a Permanent Establishment (PE) in India and how can you avoid them?

According to Article 5 of Double Taxation Avoidance Agreement (DTAA) and the concepts underpinning Permanent Establishment in India, any profits of an enterprise of one Contracting State are taxable in the other state, only if the enterprise maintains a Permanent Establishment in the second country, and only for profits are attributable to that Permanent Establishment. Thus, a Permanent Establishment is the legal compromise between your source country and resident country for the purposes of taxation of business profits. There are six categories of Permanent Establishment:

  • Place of Management Permanent Establishment
  • Fixed place Permanent Establishment (branch, office, factory, workshop, warehouse, sales outlet, website, etc.)
  • Construction Permanent Establishment (building site or construction)
  • Installation or assembly project Permanent Establishment (criteria duration of each installation project)
  • Service Permanent Establishment
  • Dependent Agency Permanent Establishment, i.e., the enterprise does not have any economic or functional independence

In a landmark decision i.e. CIT Vs. Vishakhapatnam Port Trust [(1983), 144-ITR-146 (AP)] on the subject of “Permanent Establishment”, the Andhra Pradesh High Court observed:

“The words “Permanent Establishment” postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another, which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country onto the soil of another country.”

The existence or otherwise of a Permanent Establishment is determined by applying the following tests:

Objective Tests Subjective Tests Functional Tests
The place of business test The right of use test The business activity test
The location test The permanence test The business connection test

Permanent Establishment liabilities can be avoided by a company in legal and appropriate ways, but solutions will depend on your business model and it is best to consult an expert in India. Contact our team for more information.

2018-11-13T18:20:56+00:00

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