Dependent Agents as Permanent Establishments

S. 232I. Introduction and Identification of the Problem

The preceding chapters in this book have discussed extensively under which circumstances a foreign distributing group company in particular may be classified as a dependent agent permanent establishment of a local group company under article 5(5) of the OECD Model. The present chapter assumes that a dependent agent PE exists and focuses solely on the question of whether and how profits can be allocated to such a PE.

The answer to this question mainly affects certain group restructurings. In the past, multinational companies often used local (group-internal) distributing companies, which then bore the risks, for the distribution process. Most of the distribution-related profit remained within the residence state of the respective distributing company. Under the arm’s length principle, the price paid by the parent group of the distributing company (in accordance with article 9 of the OECD Model) must include remuneration for the services performed and the risks assumed.

In seeking to optimize the group tax burden, functions and risks may be shifted, for instance, from a local distributing company in a high-tax country to the parent compa...