In principle, the U.S. tax laws seek to impose a tax on every company that is considered to be doing business in the USA. Most U.S. income tax treaties exempt resident companies and individuals of the other treaty country from U.S. federal income taxes on business profits if they do not have a PE in the United States. A Permanent Establishment (PE) is defined therein.
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Criteria
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Description
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| A permanent establishment for a business is a fixed place where the business activity is wholly or partly carried on. |
This includes:
- a place of management
- a branch an office
- a factory
- a workshop or a warehouse
- a mine, an oil or gas well, a quarry or any other place of extraction of natural resources
- an agricultural, pastoral or forestry property; and
- a building or construction site, installation or assembly project that lasts more than a certain number of months.
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| The company may also have a permanent establishment in other circumstances. |
This includes
- You set up a branch marketing sales or marketing office of your company in the USA (whether or not the branch is formally registered).
- You give your U.S. agent the authority to accept purchase orders from your customers or otherwise allow him to do so.
- Your agent uses business cards which list him as a manager for your company. (He holds himself out to the public as an employee of your company.)
- You send your employee to live in the U.S. to help your agent or distributor with technical or marketing problems, or to operate out of your (unincorporated)U.S.sales or marketing office.
- You agree to pay part of the rent of your U.S. agent’s or distributor’s office or telephone expenses and have your company name listed in the local telephone directory. The foregoing are examples only—many others could be cited.
- carrying on supervisory activities in connection with a building or construction site, installation or assembly project for less than a certain number of months, or
- carrying on activities which consist of, or which are connected with, the exploration for or exploitation of natural resources situated in theU.S.or
- using substantial equipment in the U.S. for or under contract with the enterprise, or
- performing any operations for the felling, removal or other exploitation of standing timber.
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| The company does not have a permanent establishment if it only uses facilities in the U.S. for certain activities. |
These are:
- use of U.S. facilities for, or the maintenance in the USA. of, a stock of goods belonging to the foreign enterprise for storage, display or delivery of such goods for their processing by a third party;
- maintenance of a fixed place of business that is only used for purchasing goods or merchandise or collecting information for the company
- maintenance of a fixed place of business that is used for any other activity of an introductory or supporting nature, such as advertising or scientific research.
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| U.S.income tax treaties typically list certain activities which will not result in the foreign resident company having a PE in the USA. |
These may include (depending, of course, on the terms of the particular treaty):
- exporting to the USA without any fixed placed of business in the USA or without a U.S. agent that regularly accepts orders for goods to be sold;
- utilizing a U.S. corporation, that is, one incorporated under the laws of a U.S. state, to conduct the U.S. business (e.g. manufacture or purchase of goods from the foreign parent and sale or resale thereof to U.S. distributors, dealers and customers; or sale of services);
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