handbook-tb

Preventing avoidance of permanent establishment status‣ ¾ Reliance on legal (as opposed to economic) dependence oftenled subsidiaries to be considered “independent” creatures ofother companies in the same group. As long as their activitywas remunerated at arm’s length and they were not dependentagent PEs according to Article 5 (5) of the OECD ModelConvention, substantial business profits could be stripped fromthe country of source provided that they were attributable toa non-resident company, which could be located in a low-taxcountry, 56 take advantage of hybrid structures 57 or benefit fromring-fenced regimes 58 to reduce taxation;‣ ¾ Article 5 (4) is also relevant in this context: a subsidiary oranother person could carry on auxiliary and preliminary activitieswithout such activities being accumulated and attributedto those of other persons who are related somehow to the samegroup of companies within the same jurisdiction, especially ifthey take place in different locations.In this context, as early as the 1990s and even before, fragmentationof activities or commissionaire-like agreements that permittedforeign companies to have a substantive economic business presence ina country without having a PE there could easily exist. The problem wasperceived to be so acute that, already in 1991, Skaar wrote the following:The effects of the PE concept in international fiscal law havechanged, in particular during the last few decades. Ratherthan protecting the tax base in the source State, the PE principletoday has become instrumental in ensuring avoidance ofsource-state taxation for some economically important businessoperations. 59As explained below, the reaction of the OECD was to preservethe status quo with some very limited changes and, therefore, the PEprinciple continued to act in favour of residence countries to limit thetaxing rights of source countries.56For example, Ireland.57For example, hybrid structures in the Netherlands.58For example, special regime for principals in Switzerland.59A. Skaar, Permanent Establishment: Erosion of a Tax Treaty Principle,supra note 30, at 559.355