The increased use of Information and Communication Technologies (ICT) within companies is leading to several changes within the organizational structures. Since the process of producing goods and services is often decentralised and independent of certain locations, companies and their employees are more and more mobile. In addition, the use of ICT enables different forms of telecommuting, meaning that employees can work distantly from the companys premises. Furthermore, a company does not necessarily have to install a branch in a certain country to do business there, since the use of ICT can bridge geographical and temporal distances. Moreover, a companys value added is to an increasing extent created by the provision of services. These economic changes have an impact on the applicability of international corporate tax law. A company doing business abroad is liable to tax in the source country if it has a permanent establishment there. The existence of a permanent establishment is decisive for the allocation of tax revenues among different countries and for the overall tax burden of a company. The permanent establishment definition has been developed in an era when a companys activities were less mobile and more centralised in one location and when services played a minor role for the creation of value. Given the aforementioned economic changes, it is thus debatable whether the current definition of a permanent establishment is still applicable to the changed organisational structures of a company and to what extent reforms are necessary. When applying the current definition of a permanent establishment to the changed economic structures, taxation issues result for example in connection with different forms of telecommuting, such as home-based telecommuting and mobile telecommuting, or with the increased fragmentation of the value added process. Therefore, the aim of the project is to define the taxation issues relevant to the permanent establishment definition and to develop an adequate reform proposal for the permanent establishment definition inherent in the OECD Model Tax Convention. This reform proposal should provide an equitable taxation that can be implemented in an cost-effective way and that ensures legal certainty. Moreover, an equitable allocation of the taxable base between different countries should be assured.

The enlargement of the permanent establishment term is proposed for the OECD Model Tax Convention as a central reform action. A permanent establishment shall also be existent, if employees of a firm are operating in a country for a longer duration than 12 months, independant of the location of operation. The addition of profits of those permanent establishments occurs on the basis of a functional analysis in which the performance and risks of employees are investigated. Such a regulation is feasible, since it only becomes effective in an enduring occupation abroad. Furthermore, the UN Model Convention for the prevention of double taxation, which is decisive for conventions with developing countries, already contains a comparable regulation so that one can build on existing experiences. Also, such an adaptation of the permanent establishment definition assures a cross-nationally fair division of the tax substrate and can counteract the partly feared shift of the tax revenue from resource states to residence states. Thus, a fair division of the tax revenue between the states as well as a taxation that is feasible for the entrepreneurial practice can be enabled with these developments of the permanent establishment definition, also in the age of ICT.

Project duration

01.01.2005 - 31.03.2005


Project members

Prof. Dr. Dr. h.c. mult. Otto H. Jacobs (Coordinator)
Prof. Dr. Christoph Spengel (Coordinator)


Digital Economy