Permanent establishment

A permanent establishment (PE, 고정사업장/固定事業場) means a fixed place of business which generally gives rise to income or value added tax liability in a particular jurisdiction. The permanent establishment is defined in many income tax treaties and most European Union Value Added Tax systems.

The tax systems in some civil law countries impose income and value added taxes only where an enterprise maintains a PE in the country. Definitions of PE under tax law or tax treaty may contain specific inclusions or exclusions.

In the controversial investor-state dispute between Lone Star and the Korean government, PE is the legal issue of top priority.

Key words
permanent establishment (PE), fixed place of business, value-added tax (VAT), double taxation, essential and important portion of business

Fixed place of business
The starting point for determination if a permanent establishment exists is generally a fixed place of business. The definition of permanent establishment in the OECD Model Income Tax Treaty is followed in most income tax treaties.

The commentary indicates that a fixed place of business has three components:
 * Fixed refers to a link between the place of business and a specific geographic point, as well as a degree of permanence with respect to the taxpayer. An "office hotel" may constitute a fixed place for a business for an enterprise that regularly uses different offices within the space. By contrast, where there is no commercial coherence, the fact that activities may be conducted within a limited geographic area should not result in that area being considered a fixed place of business.
 * A place of business. This refers to some facilities used by an enterprise for carrying out its business. The premises must be at the disposal of the enterprise. The mere presence of the enterprise at that place does not necessarily mean that it is a place of business of the enterprise. The facilities need not be the exclusive location, and they need not be used exclusively by that enterprise or for that business. However, the facilities must be those of the taxpayer, not another unrelated person. Thus, regular use of a customer's premises does not generally constitute a place of business.
 * Business of the enterprise must be carried on wholly or partly at the fixed place.

The requirements of what constitutes a 'permanent establishment' within the scope of a particular treaty depend on what interpretation a particular country places on that term, in context of the text of that treaty.

As per Article 3 of the Vienna Convention, no one is entitled to claim rights under a particular treaty unless otherwise authorized by the contracting state. Therefore if a particular contracting state places a different meaning on the term 'permanent establishment' than what the taxpayer seeks to place, the taxpayer would be left with virtually no remedy within that state, other than to seek a mutual agreement to that dispute with the other contracting state to that treaty.

Supreme Court case
Supreme Court held that the Korean government's disposition to impose value-added tax on a U.S. corporation should be revoked.

Main Issues and Holdings
[1] Criteria to determine a U.S. corporation as possessing a permanent establishment within Korea.

[2] In a case where Bloomberg, a foreign company based in the U.S., established a service contract with Bloomberg Korea, its Korean subsidiary, to deliver information through node equipment and specific information receivers within Korea, and for sales representatives at one of Bloomberg's foreign offices to conduct promotion and training at Bloomberg Korea's office, upon which

the tax authorities viewed Bloomberg as possessing a permanent establishment within Korea and imposed value-added tax upon Bloomberg,

the Supreme Court affirmed the ruling by the court below to view the above business activities as not constituting an essential and important portion of Bloomberg's entire scope of business, subsequently ruling that Bloomberg could not be seen as possessing a permanent establishment within Korea.

Summary of Decision
[1] In light of the wording and purport of Article 8 (1), Article 9 (1), (3) item (a), (e) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Encouragement of International Trade and Investment, the criteria for acknowledging a U.S. corporation as having a permanent establishment within Korea would be for the U.S. corporation to possess "the authority to dispose of or use" a "fixed place of business," such as a building, facility or equipment, within Korea, from which an employee of the U.S. corporation, or a person following directives issued by the corporation, performs "essential and important business activities," i.e., activities which have more than a preparatory or auxiliary character. In this context, whether business activities can be seen as "essential and important" must be determined upon comprehensive review of the nature and scale of the business activities in question, and the importance and role of these activities within the entire scope of business. Article 8 (Business Profits) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Encouragement of International Trade and Investment
 * (1) Industrial or commercial profits of a resident of one of the Contracting States shall be exempt from tax by the other Contracting State unless such resident is engaged in industrial or commercial activity in that other Contracting State through a permanent establishment situated therein. If such resident is so engaged, tax may be imposed by that other Contracting State on the industrial or commercial profits of such resident but only on so much of such profits as are attributable to the permanent establishment.

Article 9 (Permanent Establishment) of the above Convention
 * (1) For purposes of this Convention, the term "permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in industrial or commercial activity.
 * (2) The term "fixed place of business" includes but is not limited to:
 * (a) A branch;
 * (b) An office;
 * (c) A factory;
 * (d) A workshop;
 * (e) A warehouse;
 * (f) A store or other sales outlet;
 * (g) A mine, quarry, or other place of extraction of natural resources; and
 * (h) A building site or construction or installation project which exists for more than 6 months.
 * (3) Notwithstanding paragraphs (1) and (2), a permanent establishment shall not include a fixed place of business used only for one or more of the following:
 * (a) The use of facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the resident;
 * (b) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display, or deliverer;
 * (c) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;
 * (d) The maintenance of a fixed place of business for the purpose of purchasing goods or merchandise, or for collecting information, for the resident;
 * (e) The maintenance of a fixed place of business for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the resident; or
 * (f) The maintenance of a building site or construction or installation project which does not exist for more than 6 months.

Article 11 (Application of Zero Tax Rate) of the Value-Added Tax Act
 * (1) The zero tax rate shall apply to the supply of goods or services under the following subparagraphs:
 * 1. Exported goods;
 * 2. Services supplied overseas;
 * 3. International navigation services by ships or aircraft;
 * 4. Goods or services for earning foreign currency other than goods or services provided for in subparagraphs 1 through 3, which are prescribed by Presidential Decree.
 * (2) In applying paragraph (1), the zero tax rate shall, where the entrepreneur is a nonresident or a juristic person of a foreign country, apply only if a Korean resident or juristic person is identically exempted from taxes of the foreign country.
 * (3) Necessary matters concerning the scope of goods or services provided for in paragraph (1) shall be prescribed by Presidential Decree.

Article 94 (Domestic Place of Business of Foreign Corporation) of the Corporate Tax Act
 * (1) Where a foreign corporation has a fixed place where it conducts all or part of its domestic business, it shall be deemed to have a domestic place of business.
 * (2) The domestic place of business under the provisions of paragraph (1) shall include places falling under any of the following subparagraphs: 
 * 1. Branches, offices, or business offices;
 * 2. Shops and other fixed places for selling;
 * 3. Workshops, factories, or storage areas;
 * 4. Places used for building, construction and assembly sites, foundation construction sites, or places used for management and direction of such sites continuously for more than 6 months;
 * 5. Places falling under any of the following items where services are provided by employees:
 * (a) Place where services are provided for not less than 6 months in total during a period of 12 months in which such services continue to be provided; and
 * (b) Place where services are provided for not more than 6 months in total during a period of 12 months in which such services continue to be provided, and similar services are repeatedly provided for space not less than 2 years; and
 * 6. Places for exploration and gathering of mining, quarry, or marine natural resources and other natural resources (including places where there are seas and low-lying lands of marine areas adjacent to the coast of Korea outside its territorial waters where Korea exercises sovereignty under international laws).
 * (3) Where a foreign corporation without any fixed place under the provisions of paragraph (1) runs the business in Korea through a person who has the authority to repeatedly conclude contracts on its behalf or a similar person as prescribed by Presidential Decree, the location of that person’s place of business (where he does not have any place of business, it shall be his address, and where he does not have any address, it shall be the location of his residence) shall be deemed the domestic place of business of the foreign corporation.
 * (4) The domestic place of business under the provisions of paragraph (1) shall not include the places falling under each of the following subparagraphs:
 * 1. Fixed places used by a foreign corporation only for the purchase of assets;
 * 2. Fixed places used by a foreign corporation only for storage and holding of assets not for the purpose of selling;
 * 3. Fixed places used by a foreign corporation for advertisement, publicity, gathering and providing information, market research, and other places used in order to conduct such preparatory and supporting business activities; and
 * 4. Fixed places used by other persons only for processing a foreign corporation’s own asset.

[2] In a case where Bloomberg, a foreign company based in the U.S., established a service contract with Bloomberg Korea, its Korean subsidiary, to deliver information through node equipment and specific information receivers within Korea, and for sales representatives at one of Bloomberg's foreign offices to conduct promotion and training at Bloomberg Korea's office, upon which the tax authorities viewed Bloomberg as possessing a permanent establishment within Korea and imposed value-added tax upon Bloomberg, the court affirmed the ruling by the court below to view the above business activities as not constituting an essential and important portion of Bloomberg's entire scope of business, subsequently ruling that Bloomberg could not be seen as possessing a permanent establishment within Korea.

This ruling was based on the fact that the node equipment installed in Korea is nothing more than a device to receive information already processed and analyzed at the U.S. headquarters and then deliver this to customers, and when considering that the Bloomberg receiver of this case was mainly used as equipment to receive information sent by Bloomberg, the activities carried out by Bloomberg within Korea using the above equipment cannot be seen as constituting an essential and important portion of its entire scope of business, neither can activities carried out by employees at Bloomberg's Hong Kong office, to visit customers' offices within Korea and promote and advertise Bloomberg's services or explain contract terms such as information charges, etc., nor activities conducted in the office of Bloomberg Korea to educate and train customers on how to use Bloomberg equipment, be seen as an essential or important part of Bloomberg's entire scope of business.