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These notes are issued for the information of taxpayers and their tax - page 26 / 68





26 / 68


A permanent establishment and its head office are one and the same

legal entity. Therefore, a permanent establishment should not pay any amount to the head office for its investments or services. Paragraph 3 of Article 7 specifically sets out three categories of amounts which will not be deducted in determining the profits of a permanent establishment, whether they are paid to the head office of the enterprise or any of its other offices (other than

reimbursement of actual expenses):

  • (1)

    by way of royalties, remuneration, fees or any other similar payments in return for the use of patents or other rights; or

  • (2)

    by way of commission for specific services performed or for management; or

    • (3)

      by way of interest on moneys lent to the permanent establishment, except in the case of a banking enterprise, i.e. relevant interest is deductible in such a case.

  • 61.

    Likewise, the above provisions will also apply to the income of a

permanent establishment, i.e. the amounts falling within the above three categories (other than reimbursement of actual expenses) charged by the permanent establishment to the head office of the enterprise or any of its other offices would not be included in determining its profits, except that in the case of a banking enterprise the relevant interest income would be included in determining the profits of the permanent establishment.

Other methods of computing profits


If the financial statements prepared by an enterprise can give a true

view of the state of affairs of the permanent establishment, they should be used to determine the profits attributed to that permanent establishment. However, insofar as it has been customary in One Side to determine the profits to be attributed to a permanent establishment by apportioning the total profits of the enterprise to its various units or by any other methods provided for in the laws of the Side concerned, the enterprise may continue using that method. However, the result of using such a method must be in accordance with the

principles contained in Article 7.


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