A permanent establishment is created by a person, and the person is usually the manager's.

A fund formed in a centre and a holding company formed in a treaty jurisdiction are each taxable in an onshore state only on what the state's law and the treaty allow, and the principal gate is the permanent establishment: a fixed place of business in the state, or a person in the state who acts for the foreign vehicle in a way the treaty describes. The fixed place is a fact the structure controls, because the vehicle has no office onshore unless it opens one. The person is harder to control, because the person is usually the manager's: a principal who lives in the state, an adviser employed there, a representative who negotiates with landowners and developers and whose signature, or whose negotiation before someone else's signature, is the fund's commitment in substance. A person of that kind, habitually concluding contracts in the vehicle's name or playing the principal role leading to their conclusion, is a dependent agent and the vehicle has a permanent establishment where the person sits. The structure decides where the person sits and what the person signs, or the state's tax authority decides for it.

This note sets out the two kinds of permanent establishment, the dependent agent test and its modern form, the independent agent exception and its narrowness, the people in a Gulf structure who create the risk, the principal role in concluding contracts, the onshore affiliate as the answer and its own tax, the attribution of profit, the Indian position, the register jurisdictions' positions, the fixed place from a desk, the lender's reading, a comparison, a worked arrangement as a type, cases, what each party holds, the sequence, questions, terms and what to read.

The two kinds

A fixed place of business: an office, a branch, a site, a place of management, through which the vehicle's business is wholly or partly carried on. A construction site lasting beyond a period is a permanent establishment under most treaties, which matters for development platforms whose onshore joint ventures build. A dependent agent: a person, other than an independent agent acting in the ordinary course of its business, who acts on the vehicle's behalf and habitually concludes contracts in its name, or, under the modern form many treaties and domestic laws have adopted, habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the vehicle. The first kind is avoided by having no onshore place; the second is avoided by having no onshore person who does those things, and the second is where structures fail.

The dependent agent test

The classic test asked whether the person had, and habitually exercised, authority to conclude contracts in the vehicle's name. Structures answered it by having the person negotiate everything and the board abroad sign. The modern test, adopted in many treaties and in the domestic law of several states, asks whether the person habitually plays the principal role leading to the conclusion of contracts that the vehicle then concludes without material modification, and the structures' answer no longer works: a person who negotiates the terms onshore and sends them abroad for a signature that changes nothing has played the principal role, and the signature abroad is the routine conclusion the test names. The structure reads which form each treaty and each state's domestic law applies, because the answer differs by state and the newer form is spreading.

Why the person is usually the manager's

A fund has no employees; its manager does. The people who act for the fund in a state are the manager's principals and staff, or its affiliate's, and they are there because the fund's strategy needs them there: relationships with landowners, standing with authorities, knowledge of the market. The structure cannot remove them from the state without removing the strategy's reason, so the question is never whether they are there but in what capacity. The manager's instinct is to treat them as the manager's people doing the manager's work, which for a manager licensed abroad is the fund's work done onshore, and that is the fact pattern. The structure's answer is to make their capacity onshore a resident one, the affiliate's, and to keep the foreign vehicles' own acts abroad.

The multilateral instrument and the treaties' form

Many treaties were amended by a multilateral instrument that adopts the modern dependent agent form and narrows the independent agent exception for persons acting almost exclusively for connected enterprises, and each treaty's form now depends on whether both parties adopted the provision. The structure's column per state records, for each treaty between the vehicle's jurisdiction and the state, whether the modern form applies, because the practice that satisfies the older form does not satisfy the newer. Counsel reads the treaty as amended, and the reading is refreshed when either party's position changes.

The anti-fragmentation rule

Activities that would each be preparatory or auxiliary, and so excepted from the fixed place test, are aggregated under the modern rules where connected enterprises carry them on at the same place or complementary places in the state as part of a cohesive business. A manager whose affiliate's office houses the affiliate's advisers, the fund's representative and the development manager's staff, each doing a part of what together is the fund's onshore business, has a fixed place by aggregation where it would have had none by each part alone. The rule is the reason the affiliate's office is the affiliate's, with the affiliate's own business, and the foreign vehicles have nothing in it.

The independent agent exception

A person acting for the vehicle in the ordinary course of its own business as an independent agent, legally and economically independent of the vehicle, does not create a permanent establishment. A licensed distributor offering the fund to investors, a broker, a lawyer, is independent. A person who acts exclusively or almost exclusively for the vehicle, or for vehicles the manager controls, is not independent under the modern rules, and the exception does not reach the manager's own affiliate that acts only for the manager's funds. The exception is for third parties with their own businesses, and a structure that calls the manager's onshore affiliate an independent agent has named it wrongly.

The people in a Gulf structure

The people who create the risk are the ones the structure needs most: the principal who is from the state and lives there, whose relationships are the fund's access; the onshore adviser employed by the manager's affiliate to find and negotiate positions; the representative who meets landowners and developers and agrees terms; the development manager's staff who run the projects. Each is in the state, each acts for the vehicle in substance, and each concludes or leads to the conclusion of contracts. The structure does not avoid them, because they are its capability; it places them in an entity whose activity is taxed onshore in its own name, and it defines what they do for the foreign vehicles.

The principal role

The principal role is played by the person whose work leads to the contract: who identifies the counterparty, negotiates the material terms, and presents the terms for a conclusion that follows. A person who makes the first contact and then steps back, with the terms negotiated from abroad, has not played it; a person who negotiates the price and the conditions and sends a term sheet abroad for approval has. The facts are in the emails and the term sheets, and the tax authority reads who negotiated. A structure that wants the onshore person to negotiate, which it usually does, has the onshore person negotiate as the onshore affiliate's employee for the onshore affiliate's own account under a service agreement with the foreign vehicle, and the onshore affiliate is taxed onshore on its service income.

The onshore affiliate

The answer most structures adopt is an onshore affiliate of the manager, licensed in the state for advisory or management activity, employing the onshore people, providing services to the foreign vehicles under an agreement at arm's length, taxed in the state on its service income, and not authorised to conclude contracts for the foreign vehicles. The affiliate is a permanent establishment of nobody, because it is a resident company taxed on its own business; the question becomes whether its people, in playing the principal role for the foreign vehicles, make the foreign vehicles present through them. Under the modern test they may, unless the affiliate's activity is its own business and its people act for it rather than for the vehicles. The affiliate's service agreement, its pricing, its own decision-making and the foreign vehicles' own conclusion of contracts with material consideration are the facts that keep the affiliate's people the affiliate's.

The service agreement's terms

The service agreement between the foreign vehicle and the onshore affiliate states the services: identification of positions, analysis, negotiation support, preparation of recommendations, monitoring of positions, liaison with authorities and counterparties; the exclusions: no authority to conclude, vary or terminate contracts, no authority to bind, no representation of the vehicle as its agent; the pricing: cost plus a margin at arm's length with the transfer pricing file; the affiliate's own compliance with its licence; and the records each keeps. The agreement is the document the authority reads first, and its exclusions are tested against the emails, so that an agreement that excludes negotiation while the affiliate's people negotiate is an agreement the authority reads as describing another arrangement.

The attribution of profit

A permanent establishment, once found, is taxed on the profit attributable to it: the profit the foreign vehicle would have earned through a separate enterprise doing what the permanent establishment did. For a dependent agent the attribution is the agent's contribution to the vehicle's profit, which the authority may compute as a share of the vehicle's gains on the positions the agent led to, and not merely the agent's service cost. The difference between the onshore affiliate's service income, taxed at a margin, and a share of the fund's gains, taxed as a permanent establishment's profit, is the structure's exposure, and it is the reason the affiliate's people are kept the affiliate's.

The Indian position

India's domestic law and its treaties include the modern dependent agent form in most cases, and the Indian authorities read the principal role broadly. A fund's Indian adviser who identifies, negotiates and structures Indian positions and sends them abroad for a board's approval is read as creating a permanent establishment for the fund or its holding company, with profit attributed as a share of the gains. The structures that hold use an Indian advisory company, taxed in India on an arm's length service margin, with the investment decisions in substance taken abroad on papers the Indian adviser prepares as recommendations and the board materially considers; and the evidence of material consideration is the board's minute showing questions, conditions and declined recommendations.

The register jurisdictions' positions

The Gulf states apply corporate taxes of varying scope and permanent establishment rules of varying form. Some states tax foreign companies' onshore income through a permanent establishment under domestic law with treaties that follow the older or the newer form; some have adopted corporate tax regimes recently with permanent establishment definitions following the modern form; some exempt categories of investment income. Counsel in each state reads the state's domestic definition, the treaty's definition if there is a treaty with the vehicle's jurisdiction, and the state's practice, and the structure's column per state carries the form the state applies and the practice that satisfies it.

The fixed place from a desk

A fixed place is created not only by an office the vehicle opens but by a place at the vehicle's disposal: the manager's affiliate's office, if the vehicle's business is carried on from it; a principal's home, if the vehicle's business is carried on there habitually; a development site, if the site is the vehicle's. A foreign vehicle whose manager's onshore affiliate provides it with a desk from which the vehicle's own staff work has a fixed place. The affiliate's office is the affiliate's, its people are the affiliate's, and the foreign vehicle has no desk in it; the distinction is in the employment contracts, the service agreement and the signage.

The lender's reading

A lender to the vehicle reads its permanent establishment exposure as a tax liability that ranks ahead of the lender in the state and as a gross-up risk on the facility, and requires the manager's representation that the vehicle has no permanent establishment in the state and that its onshore activity is conducted through a resident affiliate under a service agreement. The lender's counsel reads the service agreement and the affiliate's licence.

By person · by risk	What they do	The risk	The structure's answer
The resident principal	Relationships, negotiation, decisions	Dependent agent by the principal role	Employed by the onshore affiliate; decisions taken abroad on recommendations
The onshore adviser	Finds and negotiates positions	Dependent agent	The affiliate's employee under the service agreement
The representative	Meets and agrees terms	Dependent agent	The affiliate's, with no authority for the vehicle
The development manager's people	Run the projects	Fixed place by site, dependent agent by contracts	The joint venture's own employees, taxed onshore
The licensed distributor	Offers the fund	None, independent agent	Third party in its own business
The board member who lives onshore	Signs for the vehicle from the state	Dependent agent by conclusion	Signs at meetings abroad, or does not sign

An arrangement, as a type

A fund in a centre with a treaty-jurisdiction holding company invests in a Gulf state and in India. The manager forms an onshore affiliate in the state, licensed for advisory activity, employing the state principal and two advisers, under a service agreement with the holding company at arm's length, taxed in the state on its margin, with no authority to conclude contracts for any foreign vehicle. The affiliate's people identify and negotiate positions and prepare recommendations; the holding company's board, sitting in its jurisdiction, considers each recommendation with questions and conditions minuted, and concludes the contracts by its own signatories at its meetings. In India an advisory company does the same on the same terms. The joint ventures' construction sites are the joint ventures' own. Counsel in each state confirmed the form of the test the state applies and the practice that satisfies it. The state's authority reviews the holding company in year four, reads the service agreement, the affiliate's tax returns and the board's minutes, and finds the affiliate taxed on its own business and the holding company present through nobody.

The structure paper's page

The structure paper carries a page per state and for India: the test's form under domestic law and under each treaty, the people and their capacities, the affiliates and their licences, the service agreements and their pricing, the boards' practice of material consideration, the fixed place analysis of each office and site, and the annual review. The page is written before the first onshore person is engaged, and it is the page the affiliate's licence application and the lender's counsel each draw on.

The development site

A development platform's onshore joint venture builds, and the site is a fixed place of the joint venture, which is onshore and taxed there in any case. The question is whether the site is also the platform's or the fund's: it is if the fund's own people run it, if the fund's contracts are concluded there, or if the site is at the fund's disposal. The joint venture's employees run the site, the joint venture concludes the construction contracts, and the platform's board decides abroad on the joint venture's board's recommendations through the platform's nominee directors, who attend the joint venture's board onshore as its directors and not as the platform's agents. The nominee directors' capacity is the fact, and their appointment letters say it.

The second fund's reading

A manager's second fund is raised on the first fund's onshore practice: the affiliates' licences and filings, the service agreements, the minutes of material consideration, and the authorities' reviews. A first fund whose holding company was assessed for a dependent agent's share of the gains is a fund whose holders' returns were reduced by the manager's onshore habits, and the second fund's anchor reads the habits; one whose practice held through a state's new regime and a treaty's amendment is a fund whose structure the second copies. The practice is the manager's onshore competence made visible to the one reader that tests it with an assessment.

The affiliate's own permanent establishment elsewhere

The onshore affiliate's people travel: to the centre for the manager's investment committee, to the treaty jurisdiction for the holding company's board, to India for the Indian position. Their travel creates no permanent establishment of the affiliate elsewhere if they attend as the affiliate's employees presenting recommendations and not as persons concluding contracts there. The same test runs in reverse, and a structure that has placed its people carefully onshore places their travel carefully too: the minute records them as attending to present, and the decisions as the board's.

Four cases, as types

A fund's resident principal negotiates positions in the state and sends term sheets to the fund's board abroad, which approves each unchanged. The state's authority, applying the modern test, finds the principal played the principal role, attributes to the fund a share of the gains on the positions the principal led to, and assesses the fund for five years.

A manager calls its onshore affiliate an independent agent. The affiliate acts for nobody else. The authority reads the affiliate's accounts, finds it exclusively the manager's, and denies the exception.

A fund's Indian adviser identifies, negotiates and structures every Indian position and the holding company's board abroad signs by circulation. The Indian authority finds a permanent establishment of the holding company in India and attributes the gains.

A structure places its people in onshore affiliates taxed on their own margins, keeps the foreign vehicles' decisions abroad on minuted material consideration, and confirms the test's form per state with counsel. The vehicles are present nowhere they did not intend.

What each party holds

The manager holds the placement of its people, the service agreements and the discipline of recommendation and decision.

The onshore affiliate holds its licence, its employees, its service income and its own tax.

Each foreign vehicle's board holds the material consideration and the conclusion of contracts, minuted.

Counsel in each state holds the form of the test and the practice.

The administrator holds the minutes showing material consideration.

The lender holds its representation and its reading of the service agreements.

Where it surfaces

It surfaces at the first onshore negotiation, when the principal agrees a price with a landowner by email. It surfaces at the affiliate's licence application, when the state asks what the affiliate will do. It surfaces at the service agreement's pricing, when the margin is set. It surfaces at the board's minute, when the recommendation is approved unchanged. It surfaces at the state's new corporate tax regime, when the definition arrives in the modern form. It surfaces at the treaty's amendment by the multilateral instrument. It surfaces at the lender's representation. And it surfaces at the authority's review, which reads the emails and the term sheets for who negotiated and the minutes for who decided.

The cost of getting it wrong

A permanent establishment found costs the foreign vehicle the state's tax on the profit attributed, which for a dependent agent is a share of the gains and not a service margin, for every year the agent acted, with interest and penalties; the treaty's protection on the sale of the onshore company; the holders' treatment, which assumed none; and the lender's gross-up. The cost of the practice is an onshore affiliate taxed on its margin, a service agreement with a transfer pricing file, and the boards' discipline of material consideration.

The committee's reading

The committee reads the permanent establishment practice annually with the residence practice, because the two share their evidence: where the people are, what they do, what the boards decide. It reads the affiliates' service agreements and their tax filings, the boards' minutes for material consideration, counsel's annual confirmation of each state's test form, and any change in the people's roles. A principal who has begun to sign onshore is a change the committee asks about before the authority does.

A timeline, as a type

At design counsel writes the test's form per state and per treaty. At formation the onshore affiliates are licensed and employ the people, under service agreements priced at arm's length with transfer pricing files. In year one the affiliate's advisers negotiate the first position and send a recommendation; the holding company's board abroad imposes two conditions and approves; the contract is concluded at the board's meeting. In year two a state adopts a corporate tax regime with the modern form; counsel confirms the practice holds. In year three the treaty between the holding company's jurisdiction and the state is amended by the multilateral instrument; counsel re-reads. In year four the state's authority reviews the holding company, reads the service agreement, the affiliate's returns, the emails and the minutes, and finds no permanent establishment. In year seven the buyer's tax diligence reads the same file and prices nothing.

The sequence

1. Counsel in each state and India writes the form of the permanent establishment test the state applies, under domestic law and each treaty.
2. The people who will act onshore are listed with what they will do.
3. Onshore affiliates are formed and licensed, employ the people, and contract with the foreign vehicles at arm's length with no authority to conclude.
4. The foreign vehicles' boards decide on recommendations with material consideration minuted, and conclude contracts at their meetings.
5. The service agreements are priced and the affiliates file and pay onshore.
6. The practice is reviewed annually against the emails, the term sheets and the minutes.

Questions a manager asks

Can the resident principal sit on the holding company's board. As a minority director deciding at meetings abroad; a director who signs from the state is a dependent agent by conclusion.

What is material modification. A board that changes terms, imposes conditions, declines some recommendations, and records why, has materially considered; a board that signs what arrives has not.

Does the affiliate's service margin attract scrutiny. Yes; it is priced at arm's length with a transfer pricing file, and the margin is the affiliate's tax base.

What about the licensed distributor. Independent, in its own business, for several managers; it does not create a permanent establishment and its engagement says what it does.

Is a construction site a permanent establishment of the fund. Of the joint venture that builds, which is onshore anyway; of the fund only if the fund's own people run the site, which they do not.

How often is the test's form checked. Annually, because states have been adopting the modern form and a treaty's form changes with the multilateral instrument's application.

Terms used

Permanent establishment: a fixed place of business or a dependent agent through which a foreign vehicle is taxable in a state.

Dependent agent: a person acting for the vehicle who habitually concludes contracts or plays the principal role leading to their conclusion.

Independent agent: a person acting in the ordinary course of its own business for several principals, excepted from the test.

Principal role: the work of negotiating the material terms that lead to a contract routinely concluded without material modification.

Material consideration: the board's substantive decision on a recommendation, shown by questions, conditions and declined recommendations.

Attribution: the profit taxed to a permanent establishment, as a separate enterprise's profit for its functions.

What to read

Each state's domestic permanent establishment definition and its treaties' articles; India's rules and guidance; the multilateral instrument's effect on each treaty; the onshore affiliates' service agreements and transfer pricing files; the boards' minutes of material consideration. On this site, the holding room under Structures, the onshore room and the development structures room.