Applying Double Tax Avoidance Agreements (“DTA”) is a measure which helps companies to reduce the tax expenses in transactions with parties being residents of a country who entered into a DTA with Vietnam. However, understanding and correctly applying the DTA is the prerequisite condition to help the tax payers mitigate the risk of being subject to tax clawback by the tax authorities. One of the difficulties in applying for tax relief and exemption under the DTA is to determine whether the foreign parties have a Permanent Establishment (“PE”) during the transaction or not. Upon the assessment of the DTA notification dossier, the tax authorities now tend to have stricter views on the PE. In this Alert, we would like to analyze the tax authorities’ view on the PE, especially for some typical transactions.
• The definition of “Permanent Establishment” in Paragraph 1, Article 5 of the DTA in general
Under the DTAs, the term “Permanent Establishment” means a fixed place of business of an enterprise, through which the business of the (foreign) enterprise is wholly or partly carried out.
• Vietnam tax authorities’ view on “Permanent Establishment” in recent cases
Pursuant to the guidance of the Circular 205/2013/TT-BTC as well as other official letters of the General Department of Taxation, except for other specific cases, the tax authorities often determine the PE based on the following three (03) conditions:
1) The existence of an “business establishment”;
2) This business establishment must be “fixed”;
3) The enterprise carries out wholly or partly of its business activities through fixed business establishment.
Defining the existence of a “business establishment”
A business establishment is not necessarily attached with a complete establishment such as a building, an office with management system. A business establishment may simply be just a vehicle, machinery or equipment or even merely a specific space used by the enterprise.
Defining the “fixed” place of business
The fixed place of business is assessed based on the regularity and stability criteria in operation of that business establishment at a specific location in Vietnam for a certain period.
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