Article 5 of the Israel U.S. Tax Treaty - Permanent Establishment

1. For the purpose of this Convention, the term “permanent establishment" means a fixed place of business through which a resident of one of the Contracting States engages in industrial or commercial activity.

2. The term "fixed place of business" includes but is not limited to:

(a) A branch;

(b) An office;

(c) A factory;

(d) A warehouse;

(e) A workshop;

(f) A farm or plantation;

(g) A store or other sales outlet;

(h) A mine, quarry, or other place of extraction of natural resources;

(i) A building site, or construction or assembly project, or supervision activity connected therewith and conducted within the Contracting State where such site or project is located, where such site, project, or activity continues for a period of more than 6 months; and

(j) The maintenance of substantial equipment or machinery within a Contracting State for a period of more than 6 months.

3. Notwithstanding paragraphs (1) and (2), a permanent establishment shall not include a fixed place of business used only for one or more of the following:

(a) The use of facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the resident;

(b) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display, or delivery (other than goods or merchandise held for sale by such resident in a store or other sales outlet);

(c) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;

(d) The maintenance of a fixed place of business for the purpose of purchasing goods or merchandise, or for collecting information for the resident;

(e) The maintenance of a fixed place of business for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the resident;

(f) A building site, or construction or assembly project, or supervision activity connected therewith, where such site, project, or activity continues for a period of not more than 6 months, or

(g) The maintenance of substantial equipment or machinery within a Contracting State for a period of not more than 6 months.

4. Even if a resident of one of the Contracting States does not have a permanent establishment in the other Contracting State under paragraphs (1), (2), and (3), nevertheless, such resident shall be deemed to have a permanent establishment in the other Contracting State if such resident sells in that Contracting State goods or merchandise which either-

(i) were subjected to substantial processing in that Contracting State (whether or not purchased in that Contracting State), or

(ii) were purchased in that Contracting State and not subjected to substantial processing outside that Contracting State.

5. A person acting in one of the Contracting States on behalf of a resident of the other Contracting State, other than an agent of an independent status to whom paragraph (6) applies, shall be deemed to constitute a permanent establishment in the first-mentioned Contracting State if such a person has, and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts in the name of that resident, unless the exercise of such authority is limited to the purchase of goods or merchandise for that resident.

6. A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident engages in industrial or commercial activity in that other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business.

7. A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident sells at the termination of a trade fair or convention in such other Contracting State goods or merchandise which such resident displayed at such trade fair or convention.

8. In determining whether a resident of one Contracting State has a permanent establishment in the other Contracting State there shall not be taken into account the fact that such resident may be related to either a resident of the other Contracting State or

Commentary to Article 5 of the Israel - U.S. Tax Treaty

This Article defines the term “permanent establishment.” The existence of a permanent establishment is relevant under Article 8 (Business Profits) to the taxation of industrial or commercial profits and in determining the applicability of other provisions of the Israel U.S. Tax Treaty.

Under paragraph (1), the term “permanent establishment” means a fixed place of business through which a resident of one of the Contracting States engages in industrial or commercial activity. Illustrations in paragraph (2) of a fixed place of business include a branch; an office; a factory; a warehouse; a workshop; a farm or plantation; a store or other sales outlet; a mine, quarry or other place of extraction of natural resources; a building site, or construction or assembly project, or supervision activity connected therewith and conducted within the Contracting State where such site or project is located, where such site, project or activity continues for a period of more than six months; and the maintenance of substantial equipment or machinery, including for example, a drilling rig, within a Contracting State for a period of more than six months.

As a general rule, any fixed facility or premises through which a resident conducts industrial or commercial activity for an indefinite or substantial period of time will be treated as a fixed place of business unless it is used only for one or more of the activities described in paragraph (3).

Under the building site or construction or installation project rule, the six months period begins only when work or supervision physically commences in the other Contracting State. A series of contracts or projects which are interdependent both commercially and geographically is to be treated as a single project for the purpose of applying the six months test.

Paragraph (3) specifically provides that a permanent establishment does not include a fixed place of business if it is used only for one or more of the following:

“(a) The use of facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the resident;

“(b) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display, or delivery (other than goods or merchandise held for sale by such resident in a store or other sales outlet);

“(c) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;

“(d) The maintenance of a fixed place of business for the purpose of purchasing goods or merchandise, or for collecting information for the resident;

“(e) The maintenance of a fixed place of business for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the resident;

“(f) A building site, or construction or assembly project, or supervision activity connected therewith, where such site, project, or activity continues for a period of not more than 6 months, or

“(g) The maintenance of substantial equipment or machinery within a Contracting State for a period of not more than 6 months.”

As noted, a fixed place of business used only for one or more of these purposes will not be considered a permanent establishment under the Israel U.S. Tax Treaty. The exception of paragraph (3)(b) relating to the maintenance of a stock of goods or merchandise for the purpose of storage, display, or delivery contains language which makes clear that goods held for sale in a store or other sales outlet are not included in the exception. This emphasizes the rule that goods held in a store or other sales outlet are not merely being held for storage, display or delivery.

Paragraph (4) provides that even though a resident of one Contracting State does not have a permanent establishment in the other Contracting State under paragraphs (1), (2), and (3), such resident will be deemed to have a permanent establishment in the other Contracting State if such resident sells in that Contracting State goods or merchandise which either were subjected to substantial processing in that Contracting State (whether or not purchased in that Contracting State), or were purchased in that Contracting State and not subjected to substantial processing outside that Contracting State.

Under paragraph (5), a person acting in one Contracting State on behalf of a resident of the other Contracting State, other than an agent of an independent status to whom paragraph (6) applies, will be deemed to constitute a permanent establishment if such person has, and habitually exercises in that first-mentioned Contracting State, an authority to conclude contracts in the name of the resident, unless the exercise of the authority is limited to the purchase of goods or merchandise for the resident.

On the other hand, paragraph (6) provides that a resident of one Contracting State will not be deemed to have a permanent establishment in the other Contracting State merely because such resident engages in industrial or commercial activity in such other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business.

Paragraph (7) provides that a resident of one Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident sells at the termination of a trade fair or convention in the other Contracting State goods or merchandise which were displayed by such resident at the trade fair or convention. The trade fair exception is not intended to apply with respect to goods in the resident’s inventory.

Under paragraph (8), the determination of whether a resident of one Contracting State has a permanent establishment in the other Contracting State is to be made without regard to the fact that such resident may be related to a resident of the other Contracting state or to a person who engages in business in that other Contracting State (whether through a permanent establishment or otherwise). What is relevant is whether the resident of the other State carries on for the resident of the first-mentioned state an activity which, within the provisions of this Article, would make the resident of the other State a dependent agent of the resident of the firstmentioned State.

As defined in Article 11 (Related Persons), a person is related to another person if either person owns or controls directly or indirectly the other, or if a third person or persons own or control directly or indirectly both.

Paragraph (9) provides that the principles set forth in this Article are to be applied in determining whether there is a permanent establishment in a State other than one of the Contracting States or whether a person other than a resident of one of the Contracting States has a permanent establishment in one of the Contracting States. This is necessary for the proper application of paragraph (2) of Article 4 (Source of Income). This paragraph is not intended to extend the benefits of the Israel U.S. Tax Treaty to persons other than residents of the two Contracting States.

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The above is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion. It is important to consult with an Israeli tax lawyer on the practical application of the Israel US tax treaty.


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