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Permanent establishment in the context of Multilateral Instrument (MLI)


MLI is an international tax law instrument which significantly affects the application of double tax treaties. MLI regulates, among others, permanent establishments.


What is MLI?

On 7 June 2017, in Paris, 68 countries signed the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument or MLI), which introduces measures to amend tax treaties. The convention allows amending at one time several dozen of tax treaties to which Poland is a party, without the need to conduct long bilateral negotiations. Poland put forward 78 tax treaties to be covered by the convention. As of the day of signing the MLI, Poland did not put forward several tax treaties, including the treaty with Germany. Furthermore, MLI will not apply to the tax treaty with the USA because the USA did not sign the MLI. However, countries can sign the MLI at a later date, as well as put forward more tax treaties to be covered by it.


Origins of the MLI

The MLI is the result of work carried out by the OECD under the Base Erosion and Profit Shifting (BEPS) project since 2013. Final BEPS reports were published on 5 October 2015 and one of the 15 BEPS Actions was the development of the MLI. By virtue of the convention the solutions developed in the course of the BEPS work can be implemented by amending tax treaties without holding bilateral negotiations.

The convention entered into force on 1 July 2018. Poland ratified it on 27 October 2017 in the form of a statute (Journal of Laws of 2017, item 2104). On 23 January 2018 Poland submitted to OECD a document confirming the ratification of the convention, as a result of which some tax treaties were amended in 2019.


The minimum scope of application of the MLI

When making a notification with regard to a certain tax treaty, countries–signatories to the MLI have an absolute obligation to observe Article 6, Article 7 and Article 16 of the convention, which refer to the so-called minimum standard, i.e.:


  1. the purpose of the provisions provided in the recitals to the tax treaties – in addition to the avoidance of double taxation and the prevention of tax evasion,
  2. anti-abuse clauses which are to prevent gaining a tax advantage,
  3. the Mutual Agreement Procedure (MAP), which is supposed to improve the existing dispute resolution mechanisms if actions of one or both of the contracting states result or will result in taxation non-compliant with the tax treaty.

In the scope exceeding the minimum standard, after making reservations and choosing non-compulsory or alternative options, it is possible for a given country not to comply with some of the provisions of the convention despite making a notification with regard to the tax treaty; this applies to e.g. provisions on “dual” tax residence, transparent entities, arbitration procedure and provisions on artificial avoidance of permanent establishment status. Any positions taken by countries in the above scope are to be expressed in the form of a Template of reservations and notifications under the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.


BEPS recommendations with regard to permanent establishment

To prevent artificial avoidance of permanent establishment (PE) status, a lot of alternative, or mutually complementary options were postulated, such as:


  • to broaden the definition of dependent agent to include also commissionnaire arrangements or other closely related representatives,
  • to narrow the group of fixed places of business which do not trigger a PE,
  • to introduce mechanisms preventing the splitting-up of construction (assembly) contracts.


Poland’s opinion on permanent establishments

According to Poland’s viewpoint, all regulations concerning taxation of a permanent establishment will be subject to bilateral negotiations. As a consequence of reservations filed by Poland, tax treaties to which Poland is a party do not change in the scope of taxation of PEs,, regardless of the opinion of the other contracting party.


Poland will not add, among others, Article 10 MLI (anti-abuse rule for permanent establishments situated in third jurisdictions), Article 12 MLI (on artificial avoidance of permanent establishment status through commissionnaire arrangements and similar strategies), Article 13 MLI (artificial avoidance of permanent establishment status through the specific activity exemptions), Article 14 (splitting-up of contracts) and Article 15 MLI (definition of a person closely related to an enterprise) to its tax treaties.


However, it is worth explaining those PE-related changes proposed in the MLI which can be introduced to tax treaties to which Poland is a party by way of mutual negotiations.


Dependent agent

Pursuant to Article 12 MLI, a PE in the form of a dependent agent will also be triggered where a contract conclusion is a direct consequence of a person’s (agent’s) acting for and on behalf of the principal, even if he does not conclude the contract but that person habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise. Such contracts may also be concluded by the agent to transfer the ownership of, or to grant the right to use, property owned by that enterprise. The changes provided for by the convention are particularly important for enterprises selling their goods abroad through various distribution agencies characterised by limited economic risk. As a consequence, activity performed abroad by agents or intermediaries will be taxed abroad in the scope larger than before.

Doing business through an independent agent does not trigger a permanent establishment. Where, however, a person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related, that person will not be considered to be an independent agent. A person is closely related to an enterprise if, based on all the relevant facts and circumstances, one has control of the other or both are under the control of the same persons or enterprises. In any case, a person shall be considered to be closely related to an enterprise if one possesses directly or indirectly more than 50 per cent of the beneficial interest in the other (or, in the case of a company, more than 50 per cent of the aggregate vote and value of the company’s shares or of the beneficial equity interest in the company).


Activity of a preparatory or auxiliary character

Enterprises may artificially avoid permanent establishment status through, among others, fragmentation of a rather extensive scope of activities deemed to be of a reparatory or auxiliary character in the tax treaties based on the OECD Model Convention (OECD-MC). Article 13 MLI prevent that by amending the catalogue of exemptions in Article 5(4) of the OECD-MC. Fragmentation of the core activity of an enterprise can help avoid the permanent establishment status in the source state (i.e. the state where the establishment is located).

The definition of an activity of a preparatory or auxiliary character depends on the nature of business and the approach of the local tax authorities. An activity of a preparatory or auxiliary character should not be an activity playing a major role in the functioning of a given business model. MLI strives for limiting the exemptions (when despite maintaining a fixed place of business no PE is triggered) to activities of a preparatory and auxiliary character.


A PE will be triggered also if closely related enterprises carry on business activities at the same place (or at another place in the same Contracting Jurisdiction) through a fixed place of business and the overall activity is not of a preparatory or auxiliary character but the business activities constitute complementary functions that are part of a cohesive business operation. This is supposed to prevent artificial business fragmentation.

Construction / installation establishment

A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months (Article 5(3) OECD-MC). The purpose of Article 14 of the MLI is to prevent splitting-up of contracts (and similar) between closely related enterprises. Different periods of time, if each of them is longer than 30 days, shall be added to the aggregate period of time during which the construction or installation project or activity is carried out. The overall evaluation should be carried out from the point of view of activities carried out by all associated enterprises, and not from the perspective of a single entity, e.g. created artificially by separating it from the organisational structure.


If you are interested in permanent establishments or other topics, our tax advisers in Cracow, Gdansk, Gliwice, Poznan, Warsaw and Wroclaw will be happy to help you. 


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Dominika Tyczka-Szyda

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