Category Archives: Permanent establishment (PE)

What is Permanent establishment (PE)?

Definition of PE may vary from different jurisdictions, since each jurisdiction have different provincial, state and/or federal laws therefore permanent establishment treatment for Domestic Law various from the international laws. However the objective may be the same, which is to allow the taxation authorities to exercise their power by relying on a guide to determine which authority may have the legal right to tax the produced income. These rules determine, when and how much another province/state or country may tax an enterprise which carries out a business on their soil. Canada and USA have negotiated tax treaties with each other and other countries (some reasons) in order to resolve conflict and elimination of double taxation when taxpayers are operating in two countries.

Most of the time in order to determine if a PE exists it is required to understand the nature of the business – what functions, operations and activities are carried out, and what individual employees are doing on behalf of their employer.

A permanent establishment should not be confused with a subsidiary. A subsidiary is a separate legal entity. A permanent establishment is not, it is merely a branch and as such an extension of the head office

Tax law, tax treaties, jurisprudence and administrative practices have has been evolving over time. The concept of the PE has been adapted to incorporate new ways of doing business and more in particular internet sales.

Furthermore, filing requirements may result from having a permanent establishment in Canada or in another country.

Domestic law


  • ITA 2(1) – Canadian residents are subject to Canadian tax on world-wide income


  • ITA 124(1) and ITR 400-402 – Permanent establishment concept applicable in the allocation of provincial income


  • IT-177R2 – Permanent Establishment means a fixed place of business


–       The principal place at which business is conducted

–       The place where a business is carried on through an employee or agent with general authority to contract or who has a stock of merchandise from which orders are filled

–       Corporation which otherwise has a permanent establishment in Canada owns land in a province – the land is the permanent establishment

–       Place where a corporation uses substantial machinery or equipment

  • ITA 2(3) covers non-residents


–       Where a person is not subject to income tax under subsection 2(1) (not resident in Canada) subsection 2(3) provides that if that person

–       Was employed in Canada;

–       Carried on a business in Canada, or

–       Disposed of a taxable Canadian property

Any income tax will be payable upon taxable income determined under division D (sec 115 and 116)

Note that the words “business” is defined in subsection 248(1) and extended meaning of “carrying on business in Canada” in Section 253.

Tax treaties

Once it has been established that a business is being carried on in Canada by a resident of the US, it is necessary to refer to the treaty to determine if its provisions override the Canadian law, as it otherwise applies.  The treaty would only be invoked to provide relief.  A tax treaty will not create an obligation if the obligation does not exist under domestic law.

The main use of the concept of a PE is to determine the right of a Contracting State to tax the profits of an enterprise of the other Contracting state.

The provisions of Article 5 (of OECD Model Tax Convention) also apply in determining whether any person has a PE in any State.  These provisions would determine whether a person other than a resident of Canada or the US has a PE in Canada or the US, and whether a person resident in Canada or the US has a PE in a third state. The key determinants of a PE is defined in Article V – (1) must be a place of business (2) the place of business must be fixed; and (3) the carrying on of the business of the enterprise through this fixed place of business

Under Article 7 of the Canada-US Tax treaty, a contracting state cannot tax the profits of an enterprise of the other contracting state unless the profits are attributable to the PE situated therein.

Article V of the Canada – US tax treaty is for a great part similar to Article 5 of the OECD model tax convention.

Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.