Non-resident insurers: scope of UK taxing rights: section 11 ICTA and OECD Model Treaty: permanent establishment
INTM264050+ discusses in detail the domestic law definition of permanent establishment, and INTM266030+ Article 5 of the OECD Model Treaty which deals with permanent establishment. This paragraph of GIM discusses some specific insurance issues relating to permanent establishment.
There are two important limbs to the definition
- Article V(1): a fixed place of business through which a business is wholly or partly carried on
- Article V(7): expressed negatively in the Article, a permanent establishment does not exist if business is carried on through a broker, general commission agent or any other agent of an independent status, provided it is acting in the ordinary course of their business - expressed positively, this deals with a ‘dependent agent permanent establishment’, or DAPE.
Also of importance is
- Article V(5) - unless the activities are those of an independent agent within Article V(7), activities will give rise to a permanent establishment if there is an authority to conclude contracts in the name of the business
- Article V(6) - this excludes certain activities, such as advertising and collection of information, if that is all they amount to.
The OECD Model Treaty does not contain an Article on the lines of Article 6(5) of the UN Model Treaty (this tends to give greater taxing rights to the Host State, and is more often encountered in relation to developing countries, but the actual Treaty should always be examined). This Article deems a permanent establishment to exist in a State if the activities there include collecting premiums or insuring risks other than through an independent agent. GIM10115 explains that intention is important in construing treaties, and so the absence of such an Article will found an argument on a contrario lines that these features are not sufficient unless the treaty does contain the UN Model Article.
This proposition was considered and approved in a Canadian case involving an insurer, Knights of Columbus v HM Queen. It was also concluded that
- if an agency is legally or economically dependent, then Article V(5) applies and activities will amount to a permanent establishment if there is an authority to conclude contracts in the name of the business
- if, on the other hand, the agent is independent, then there will be a permanent establishment only if Article V(1) applies and the activities carried on through a fixed place of business are the business of the insurance company
- distinguishing between a place used for the agent’s own activities and one used by the agent for the insurer’s activities is assisted by the reference in the OECD Model Commentary to a fixed place of business being ‘at the disposal’ of the enterprise (insurance company, in this context): this does not mean having the key, it must be a place of permanence, through which the business is carried on, and indicative factors for being at the insurer’s disposal are that it pays the expenses, requires the agent to use it, stipulates what the office will contain and that customers will be met there
- once it has been determined that the agent is in business on its own account, it is illogical to find that administrative operations it conducts, even if not at the home office, are anything other than activities of its own business
- if there is a dependent agent permanent establishment, the Article V(6) exclusions are applied in the light of all the agent’s activities (not just at the home office), but if applying it to a fixed place of business, only the activities there are considered.
Although this case is of only persuasive authority, it suggests that, provided the insurance risk is genuinely borne elsewhere (see GIM10220), and the agent is independent, significant insurance-related activities can take place in a State without giving rise to a permanent establishment. In that case, focus is on the service fee charged to the agent.