When a resident of one country earns income from sources in another country, his income might be taxed in both the countries based on source principle in one country and following his residential status in residence country. To remove this double taxation effect, Concept of Permanent Establishment has been included while framing Tax Treaties with different countries.
Treaty based international fiscal law has considered the concept of Permanent Establishment (PE) most important. To create taxing jurisdiction over a foreigner’s business activities, US (United States of America) DTAA Model uses PE as the main instrument.
As per the PE Concept, Profits of Business (Arising from a US Incorporated enterprise) of a resident Indian are taxed in India only if that enterprise maintains a PE in India and only to the extent that profits are attributable to the PE. Sometimes enterprises need to pay taxes in the country of Sourced Income as well in the country of resident. In such cases, taxes paid in the source country are allowed as credit in the residence country while filing income tax return.
A PE is the fixed place of business in the residence country through which business of a foreign enterprises is maintained. It would amount to virtually handling an enterprise in US while living in India.
The management activities can be operated through such fixed place by physically establishing an office at that place. Then Only the place of management will be considered a PE for taxation purpose. A place in temporary nature, would not constitute a PE.
Following are some establishments included in Article 5 within PE:
Place of management
Mine, oil or gas, quarry or any other place of extraction of natural resources
To conclude, we can say that a foreign company, non-resident in India may be taxed in India if it is operating through a Permanent Establishment in India. That means PE is the most crucial concept to understand for any enterprise that operates internationally. This is the principal means through which an enterprise may be exposed to corporate income tax, value-added tax, filing tax returns, and compliance with a range of other obligations in the country of source.
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