Article 13 of the MLI modifies Article 5(4) of the OECD Model Tax Convention, which deals with a list of exceptions that do not constitute a Permanent Establishment. The rationale behind creating an exception list is that all activities mentioned in the list have a preparatory or auxiliary character that is not enough to establish a significant economic presence in another jurisdiction.
Article 13(1) of MLI
The opening paragraph of Article 13 of MLI provides the Contracting Jurisdictions to choose:
- Option A (Paragraph 2 of Article 13)
- Option B (Paragraph 3 of Article 13)
- None of the above options.
Option A
Option A is a non-obstante clause. Therefore, if a Contracting jurisdiction chooses Option A, then Paragraph 2 of Article 13 of MLI will override the existing provisions of the Covered Tax Agreement defining the exceptions to the Permanent Establishment rules.
The below-mentioned activities or the overall activity of a fixed place of business is excluded from the definition of PE if it is of preparatory or auxiliary character:
- The activities listed explicitly in the existing Covered Tax Agreement are deemed not to constitute a PE, irrespective of the activity being preparatory or auxiliary in nature.
- The maintenance of a fixed place of business solely to carry on for the enterprise any activity not described in subparagraph a.
- The maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a and b.
The effect of applying Article 13(2) of the Convention would be to preserve the exceptions for activities described in Article 5(4)(a) through (d) of the Covered Tax Agreement but to make those activities subject to the condition that the activity is of a preparatory or auxiliary character.
Option B
Option A is a non-obstante clause. Therefore, if a Contracting jurisdiction chooses Option A, then Paragraph 3 of Article 13 of MLI will override the existing provisions of the Covered Tax Agreement defining the exceptions to the Permanent Establishment rules as follow:
- The activities listed explicitly in the existing Covered Tax Agreement are deemed not to constitute a PE, irrespective of the activity being preparatory or auxiliary in nature. Except to the extent that the CTA provisions explicitly provide that a specific activity shall be deemed not to be a PE given that the activity is of a preparatory or auxiliary in character. – Article 13(3)(a) of MLI
- The maintenance of a fixed place of business solely to carry on, for the enterprise, any activity not described in subparagraph a), provided it is of a preparatory or auxiliary character – Article 13(3)(b) of MLI
- The maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) and b), provided that the overall activity is a preparatory or auxiliary character. – Article 13(3)(c) of MLI
The effect of applying Article 13(3) of the Convention would be to preserve the exceptions for activities described in Article 5(4)(a) through (d) of the Covered Tax Agreement but to ensure that those exceptions will apply irrespective of whether the activity is of a preparatory or auxiliary character. It would be true whether that Contracting Jurisdiction takes the position that the exceptions in Article 5(4)(a) through (d) [OECD] of that Covered Tax Agreement are considered per se exceptions to permanent establishment status, or the position that they are already contingent on the activity being of a preparatory or auxiliary character.
An exception is provided in Article 13(3)(a) of the MLI; however, to preserve existing provisions of a Covered Tax Agreement that explicitly provide that a specific activity shall be deemed not to constitute a permanent establishment provided that the activity is of a preparatory or auxiliary character.
Anti-fragmentation – Article 13(4) of MLI
Paragraph 4 of Article 13 of MLI is based on the updated Article 5(4) of the OECD Model Tax Convention mentioned in the Action 7 Report on anti-fragmentation provisions. It addresses the issues of fragmentation of activities between closely related parties.
Paragraph 4 of Article 13 of MLI states that the provisions of a Covered Tax Agreement as modified by Article 13(2) or Article 13(3) of MLI, that lists specific activities not to constitute PE shall not apply if:
the same enterprise or a closely related enterprise carries on business activities at the same place or at another place in the same Contracting Jurisdiction AND
- that place or other place constitutes a permanent establishment for the enterprise or the closely related enterprise under the provisions of a Covered Tax Agreement defining a permanent establishment; OR
- the overall activity resulting from the combination of the activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, is not of a preparatory or auxiliary character,
provided that the business activities carried on by the entities mentioned above constitute complementary functions that are part of a cohesive business operation.
Compatibility Clause
Article 13(2) or Article 13(3) of MLI shall apply in place of the relevant parts of provisions of a Covered Tax Agreement that list specific activities not constituting a permanent establishment. – Article 13(5)(a) of MLI
Article 13(4) of MLI shall apply to provisions of a Covered Tax Agreement (as they may be modified by paragraph 2 or 3) that list specific activities that are deemed not to constitute a permanent establishment even if the activity is carried on through a fixed place of business (or provisions of a Covered Tax Agreement that operate in a comparable manner). – Article 13(5)(b) of MLI
Reservation Clause for Article 13 of MLI
A Party may reserve the right:
- for the entirety of Article 13 of MLI not to apply to its Covered Tax Agreements;
- for Article 13(2) of MLI not to apply to its Covered Tax Agreements that explicitly state that a list of specific activities shall be deemed not to constitute a permanent establishment only if each of the activities is of a preparatory or auxiliary character;
- for paragraph Article 13(4) not to apply to its Covered Tax Agreements.
Notification Clause for Option
Each contracting jurisdiction that chooses to apply an Option under paragraph 1 of Article 13 of MLI shall notify the Depositary of its choice of Option.
Notification Clause
Each contracting jurisdiction that does not choose an Option and makes no reservation under Article 13(6) of MLI shall notify the Depositary of whether each of its Covered Tax Agreements contains a provision described in Article 13(5)(b) and the article and paragraph number of each such provision.
Paragraph 4 shall apply to a provision of a Covered Tax Agreement only where all Contracting Jurisdictions have made a notification for that provision under this paragraph or paragraph 7.