Agency Pe Oecd

The (origin of the) concept of agency PE in the OECD Model and its differences between civil law and common law countries

Paragraphs 5 and 6 of Article 5 of the OECD Model Convention (the provisions) deal with the so-called “Agency Permanent Establishment” (hereinafter agency PE) whereby, in general terms, it is intended for states of source to preserve their taxing rights upon economic activities generated within their jurisdiction carried by a person (legal or natural) acting “in the name of” or “in behalf of” a principal situated in a different state, with the condition that certain requisites are met.

The first issue to be analyzed in this paper is the following: One essential requisite for the constitution of an agency PE is precisely that the so-called agent, concludes contracts "in the name of" a principal. This expression can be understood in i) a “literal criterion”; ie: that the contract is literally signed in the name of the principal; ii) or in a way in which this requisite is only complied as long as the contract legally binds the principal disregarding whether the contract was signed in the name of it or not (hereinafter the “legal criterion”).

Different scholars have stated that the determining factor to define the existence of an agency PE is that the agent must legally bind the principal when concluding contracts. For this matter, civil law countries and common law countries diverge in defining how and when a principal is to be considered legally bound by an agent acting on its behalf.

As a general rule, in civil law countries, an agent concluding a contract under its own name and on behalf of a principal would not bind the latter. Conversely, in common law countries, an agent concluding contracts under its name but on behalf of a principal would bind the latter for any legal consequences that may arise.

The second issue that will be addressed in this paper, which is strictly linked with the first issue, is the relationship between paragraphs 5 and 6 of Article 5 of the OECD Model Convention. Paragraph 5 refers to situations where the dependent agency concept is met whereas paragraph 6 embodies the concept of an agent with an independent character. The discussion brought upon these two paragraphs is mainly whether the latter constitutes an exception of the former or if they are to be tested one after the other. As we will analyze, this is of great importance especially for interpretation proposes by tax authorities as they may broaden the scope that covers the concept of agency PE and as a consequence their tax revenue.

This paper will approach the foregoing issues, taking into account relevant historic documents that provide with a standpoint as to what the nature, origin and intention of this provision really is, from a perspective of both common law and civil law countries. For sake of simplicity, examples of different systems will be embodied in a comparative way to resemble the main different conclusions that can result when analyzing these very distinct systems.