Treatment of Wages Contained in a Service Fee Charged to the Egyptian Permanent Establishment

If an Austrian company, which is specialised in industry plant constructions, has set up a permanent establishment in Egypt in order to fulfil its contractual obligations to modernise a hot strip mill in Cairo Article V and Article XIV para. 2 of the Austrian-Egyptian Double Taxation Convention (DTC) allocate specified taxing rights to Egypt.

Article V provides that the profits of the Austrian company may be taxed in Egypt insofar as they are attributable to the Egyptian permanent establishment. Profits have to be attributed to the Egyptian permanent establishment according to the "arm's length principle", as laid down in Article V para. 3 DTC. If the Austrian head office has to carry out work in the frame of the modernisation project the result of which is then provided to the Egyptian permanent establishment then the "arm's length principle" requires that the Egyptian permanent establishment is charged with an appropriate fee for the supply of such services. It is evident that such charge has to compensate the head office for all expenses incurred in Austria (including salary expenses for the head office staff).

Article XIV para. 2 concerns the taxation of employment income and all...