Attribution of Profits to Permanent Establishments

1. S. 60Historical Background

The concept of permanent establishments (PE) as the basis for the allocation of profits deriving from gross border business activities is more than 100 years old. Attempts to create the PE concept can be traced back to the second half of the 19^th century. The concept of a PE emerged in the German Empire after 1845. Initially, the objective was to prevent double taxation between Prussian municipalities, and this was extended to the entire German federation. The empire of Austria-Hungary and Prussia concluded on 21 June 1899, the so called worldwide first modern Treaty for avoiding double taxation that could have resulted from the application of the tax laws of both countries. Art 2 of the said tax treaty determines that business income should be subject to direct taxation only in the state in which the enterprise carries on business through a PE.

The current PE concept still reflects the principles and structures developed in the 1920s by the League of Nations. As between the world-wars double taxation of income from cross-border activities resulting from the overlapping of residence based and source taxation increased, the calls became loud for measures to pr...