Permanent Establishment - Key developments
The Permanent Establishment (PE) concept is a well-established principle in international taxation, and is one of the most critical aspects in determining the taxing rights of the source country.
The Sri Lankan Permanent Establishment
In Sri Lanka, the PE concept was previously embodied in the Double Tax Agreements that were entered into by the Government of Sri Lanka with its treaty partners. However, with the introduction of the Inland Revenue Act No. 24 of 2017 the Act), effective from 1 April 2018, the concept of PE has also been recognised in the domestic statute. The law sets out the definition of both a Foreign PE and Sri Lankan PE, encompassing a similar definition to that embodied in the treaties.
Section 195 of the Act defines a Foreign PE and Sri Lankan PE as follows:
- “foreign permanent establishment” means a fixed place of business of a resident person situated in a foreign country where the business is conducted continuously for at least six months, but excludes any place at which only activities of a preparatory or auxiliary nature are conducted”
- “Sri Lankan permanent establishment” means a place in Sri Lanka where a non-resident person carries on business or that is at the disposal of the person for that purpose and includes:
(a) a place in Sri Lanka where a person has, or is using or is installing substantial equipment or substantial machinery;
(b) a place in Sri Lanka where a person is engaged in a construction, assembly or installation project for 90 days or more, including a place where a person is conducting supervisory activities in relation to such a project;
(c) the provision of services in Sri Lanka, but only if activities of that nature continue (for the same or a connected project) for a period of 183 days or more in any 12 month period; and
(d) a place in Sri Lanka where an agent performs any function on behalf of the business of a non-resident person –
(i) including, in the case of an insurance business, the collection of premiums or the insurance of risks situated in Sri Lanka; but
(ii) excluding a case involving a general agent of independent status acting in the ordinary course of business as such”.
Withholding taxes are final payments in the hands of a non-resident unless it is received through a Sri Lankan PE.
PE in transfer pricing
For transfer pricing purposes, the Act deems any transactions between a PE in Sri Lanka and its Head Office and other related branches as transactions between distinct and separate entities. To this end, the transfer pricing rules defines as a PE in Sri Lanka as follows:
- In relation to a country with which an agreement has been entered into on avoidance of double taxation: a PE defined in an agreement for the relief of double taxation where an agreement is in force between the government of Sri Lanka and the government of any territory in which any person and their agencies, branches or establishments in Sri Lanka is resident.
- If there is no double tax avoidance Agreement: any business connection or a fixed place of business through which the business of the enterprise is wholly or partly carried out irrespective of the number of days of such business carried out in Sri Lanka.