BEPS Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status

Multinational groups use structures to operate in countries without creating a permanent establishment (PE) and thus avoiding corporate taxation. Action 7 closes these gaps in Art. 5 of the OECD Model Tax Convention.

• Expansion of the agency concept: commissionnaire structures create a PE
• Narrowing of exemptions for preparatory and auxiliary activities
• Anti-fragmentation rule against splitting up coherent activities
• Implementation via MLI (Art. 12-15) or bilateral negotiations
• Not a minimum standard but widely implemented

The classic permanent establishment definition (Art. 5 OECD MC) contained broad exemptions for preparatory and auxiliary activities and narrow agent definitions. Large corporations (notably in e-commerce) used commissionnaire structures to avoid PEs.

The 2015 final report recommended amendments to the OECD Model Tax Convention. These were incorporated in the 2017 OECD MC update. The MLI contains corresponding provisions (Art. 12-15). Supplementary guidelines on profit attribution to newly created PEs were published in 2018.

Action 7 concerns multinational groups conducting sales, services or other activities abroad without a formal establishment, in particular:

• Commissionnaire structures (sales without transfer of ownership)
• Digital service providers with local infrastructure
• Groups fragmenting activities across subsidiaries

• Redefinition of the agent concept: dependent agents who habitually conclude contracts, or play the principal role leading to the conclusion of contracts routinely concluded without material modification by the enterprise, create a PE
• Narrowing of the exemption list (Art. 5 para. 4): activities must be genuinely preparatory/auxiliary
• Anti-fragmentation rule: closely related activities are aggregated
• Adjustment of profit attribution to newly created PEs
• Contract-splitting rule (Art. 14 MLI): connected construction contracts are aggregated to determine the 12-month PE threshold for construction sites

4 corrections:
- Agent definition outdated: 'negotiate' instead of 'principal role' test
- Typo: Double 'k' in 'Grosskkonzerne'
- Typo: 'Ausnameliste' instead of 'Ausnahmeliste'
- Wrong technical term: 'hilfreich' (helpful) instead of 'auxiliary'
1 update:
- official_url uses deprecated OECD path structure
3 clarifications.