INTM264600 - Non-residents trading in the UK: permanent establishment: domestic and treaty law: taxation of services

Generally services are treated in the same way as other types of business activities, that is the combined effect of Article 5 and 7 is such that profits from services performed in the UK by a non-resident are not taxable if they are not attributable to a permanent establishment.

Alternative provision

The OECD Commentary to Article 5 states that:

‘… all member States agree that a State should not have source taxation rights on income derived from the provision of services performed by a non-resident outside that State.’

However, it recognised that some states considered that profits from services provided by a non-resident ought to be taxed in the state where the services were performed even if there were no permanent establishment, as defined in Article 5. The rationale was that some service businesses did not require a fixed place of business in order to carry on a substantial level of business activities.

The OECD Commentary therefore provides an example of a “services provision” that can be used in tax treaties that permits the taxation of services in the source state. The provision described in the OECD Commentary at 42.23 of the 2014 edition has the effect of deeming a permanent establishment to exist where one would not otherwise do so.

It is important to remember that since the provision simply creates a permanent establishment where none would otherwise exist, it does not provide an alternative definition of the concept of permanent establishment and obviously cannot limit the scope of the definition in Article 5(1) and Article 5(5).

Conditions for the alternative provision

The following conditions must be met:

• services must be performed in a state by a non-resident enterprise;
• there should be a minimum level of presence in the other contracting state, normally an individual present for more than 183 days in any 12 month period;
• the services must be provided by the enterprise to third parties.

The provision only applies to profits from these services rather than to the payments for them.

Additionally the commentary makes it clear that two contracting states are free to agree bilaterally to include this alternative provision in their tax treaties; consequently, it does not allow a permanent establishment to be found merely because the conditions described in this provision have been met i.e. there has to be an alternative provision clause within the treaty.