Non-residents trading in the UK: permanent establishment: domestic and treaty law: dependent agent permanent establishment (‘DAPE’): agent of independent status
As stated both in domestic law (CTA2010/S1142(1) and treaty law (see Article 5(5) of the model tax treaty) one of the key conditions for a DAPE is that the agent must be a ‘dependent agent’ (i.e. not of independent status).
Article 5(6) further clarifies by stating where the agent acting for the enterprise is a broker, general commission agent or other agent of independent status acting in the ordinary course of their own business, then an agency permanent establishment of the client enterprise will not be brought into existence.
Consequently, the Commentary states that a person (the agent) will come within the scope of Article 5(6) (i.e. he does not constitute a permanent establishment of the enterprise on whose behalf he acts) if:
- he is independent of the enterprise both legally and economically, and
- he acts in the ordinary course of his business when acting on behalf of the enterprise.
‘..independent of the enterprise both legally and economically’
The Commentary identifies the following factors which may be relevant (this is not an exhaustive list):
- Whilst an independent agent will typically be responsible to his principal for the results of his work he will not be subject to significant control and detailed instructions with respect to the manner in which the work is carried out.
- The principal relying on the special skill and knowledge of the agent is an indication of independence.
- The extent to which the entrepreneurial risk is borne by the agent with higher risk indicating greater independence.
- The number of the principals represented by the agent. Dependency is more likely if the activities of the agent are performed wholly or almost wholly on behalf of one enterprise over a long period of time.
- It is important that all facts and circumstances are taken into account to determine whether the agent’s activities constitute an autonomous business.
Additionally, the Commentary gives examples of areas which are not decisive factors in looking at dependency:
- Dependent or independent status does not turn on the shareholding relationship between principal and agent. The fact that an agent is a subsidiary company does not necessarily make it a dependent agent. However, a subsidiary company will constitute a PE of its parent company in the same way as any other agent of the parent company if the conditions stipulated in Article 5(5) of the OECD Model Treaty are met (see also Article 5(7) of the model tax treaty).
- Additionally the provision of substantial information which is simply to ensure the smooth running of the agreement and continued good relations with the principal is not a sign of dependence.
‘..acts in the ordinary course of his business…’
The Commentary highlights a number of factors to be considered:
- Activities which, economically, belong to the sphere of the non-resident enterprise rather than to that of the agent’s own business operations. In such situations persons cannot be said to act in the ordinary course of their own business. So for example a commission agent who also habitually acts, in relation to the non-resident enterprise, as a permanent agent having an authority to conclude contracts would be deemed in respect of this particular activity to be a permanent establishment since he is acting outside the ordinary course of his own trade or business (commission agent), unless his activities are limited to those mentioned at the end of Article 5(5).
- In deciding whether or not particular activities fall within or outside the ordinary course of business of an agent, one would examine the activities carried out within the agent’s trade as a broker, commission agent or other independent agent rather than the other business activities carried out by that agent.