Introduction

In many cross-border transactions involving licensing of intellectual property rights and/ or provision of technical services, foreign enterprises (licensors/ service providers) are required to perform substantial activities (“onshore activities”) in the jurisdictions of the licensees/ service-recipients (Source States). Often, that give rise to the foreign enterprises’ permanent establishments (PEs) in the Source States. But at the same time, and in most cases, such foreign enterprises are also required to perform certain activities (“offshore activities”) from outside the Source States for discharging their contractual obligations.

As per Art. 7 (Business profits) of most tax treaties, business profits attributable to a PE are taxable in the Source State.  But, the business profits articles in most tax treaties also stipulate that if such profits include items of income that are treated separately in more specific (other) treaty articles (such as royalties and fees for technical services), then such other articles (instead of the business profits article) shall apply. As a result, such income – even if earned in the ordinary course of a business – may be taxable in accordance with the more specific provision instead of the business profits article.

But interestingly,...