1. Introduction

The contemporary supply chain networks are more global than ever, and numerous enterprises outsource various functions and processes to other enterprises in foreign jurisdictions. Can such an arrangement give rise to a permanent establishment of an enterprise (i.e. the customer) outsourcing functions and processes to another enterprise in a foreign jurisdiction?

Many of us, perhaps intuitively, may be inclined to promptly answer the above-mentioned question in negative. But, the tax authorities in some important jurisdictions (for instance, India) are aggressively concluding that in certain situations outsourcing arrangements lead to permanent establishment under applicable tax treaties. Hence, we need to well-equip ourselves to confront this issue.

The above-mentioned issue is very important, and it is equally intricate. That is evident from the fact that it was the subject-matter of a recently pronounced decision of the Indian Supreme Court, wherein the taxpayer and the tax authorities fiercely contested their stances.

Though the Indian Supreme Court denied existence of a permanent establishment, the issue seems far from settled because determination of a permanent establishment depends on satisfaction of several rather complex prerequisites. And, the relevant facts in each case affect the determination as to whether those prerequisites are met. Hence, it is important to analyse as to whether an outsourcing arrangement could give rise to a permanent establishment.

Further, since many outsourcing arrangements are between related entities, it is necessary to examine as to whether parent-subsidiary (or sister-company) relationships could influence the permanent establishment implications.

In this article, we would deal with the above-mentioned aspects with help of some important judicial precedents in Belgium, France, Germany, India, and Italy.