1. Introduction

Art. 5(1) in the contemporary tax treaties defines “permanent establishment” to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. However, notwithstanding Art. 5(1), a tax treaty provision similar to Art. 5(4) of the OECD Model Convention stipulates to the effect that the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any activity (or combination of activities) of a preparatory or auxiliary character does not give rise to a permanent establishment in the source state. In that context, it is interesting to examine as to whether an enterprise’s supervision activities at a vendor’s facility – for a considerably long duration (say, exceeding one year) – could give rise to the enterprise’s fixed place permanent establishment in the jurisdiction where the vendor is situated. Alternatively, it would also be of interest to examine as to whether such activities could be regarded as ‘auxiliary activities’, in which case the existence of a fixed place permanent establishment could be negated by a PE-exclusion provision similar to Art. 5(4) of the OECD Model Convention.

Relatively recently, the Danish Tax Board had an occasion to examine the above-mentioned issue in a binding ruling. That ruling is relevant even in the jurisdictions other than Denmark. It is important to note that the said ruling is one of the very few precedents dealing with the expression ‘auxiliary activities’ in the context of the tax treaty provisions similar to Art. 5(4) of the OECD Model Convention.

 

Therefore, the above-mentioned binding ruling of the Danish Tax Board is examined in detail in this article.