The permanent representative establishment in Uzbekistan

published on 10 December 2024 | reading time approx. 2 minutes

Cross-border sales activities of companies can establish a permanent establishment abroad for tax purposes, even if there is no fixed place of business. In practice, commission agent structures have therefore often been used to avoid such a permanent establishment. However, increasing pressure has been exerted on these models in recent years, as international developments, particularly by the OECD, aim to expand the definition of a permanent establishment and increasingly subject structural arrangements such as commission agent models to a permanent establishment classification for tax purposes.

The concept of a permanent establishment is of central importance in international tax law, as it regulates the tax assessment of companies in various countries. The OECD in particular has further developed the legal regulations with regard to permanent establishments of representatives.

Article 5(5) OECD-MA: The permanent establishment of an agent

Article 5 of the OECD Model Tax Convention (OECD Model Tax Convention) defines when a company is considered to be resident for tax purposes in another country. The general definition of a permanent establishment requires a company to maintain a fixed place of business abroad. Article 5(5) of the DTA, on the other hand, is an exception and describes a so-called representative permanent establishment.

Under this regulation, a company that does not have a fixed place of business abroad is treated for tax purposes as if it had a permanent establishment if certain conditions are met. The relevant circumstances include:

Activity of a person in a contracting state for a company.
This person concludes contracts or takes a leading role in the conclusion of contracts that are regularly and without significant changes taken over by the company.
The contracts relate either to the transfer of ownership or rights of use of the company's assets or the provision of services by the company.

For the application of Article 5 para. 5 DBA, it is no longer necessary for the person concerned to act as an agent in the strict sense of the term. It is sufficient that this person plays a leading role in the conclusion of the contract. This extension of the definition of a permanent establishment ensures that companies can also establish a permanent establishment abroad if they do not maintain a fixed place of business, but a local person concludes contracts or plays a leading role.

The changes resulting from the OECD BEPS Update 2017

Article 5(5) of the OECD Model Tax Convention was comprehensively revised in 2017. These amendments are a direct response to the increasing international problem of profit shifting and tax avoidance through the use of commission agent structures and similar models. The aim of the changes was to counteract the misuse of such models and to enable a more precise allocation of permanent establishments.

The main changes include the fact that the terms “power of attorney” and “on behalf of the company” are no longer required. Previously, it was disputed whether an express power of attorney from the company or a legal commitment through the contract “in the name of the company” was necessary for the representative permanent establishment. The new regulations now focus on the economic circumstances and the actual role of the person when concluding contracts.

Another important element of the revision is the clear differentiation that an agent's permanent establishment no longer depends exclusively on the legal form of the activity, but above all on the economic substance. The decisive factor is whether the company concludes contracts through the activities of a person abroad or plays a significant role in them.

Practical implications for companies in Uzbekistan

For companies operating in or with Uzbekistan in international business, the amendments to the OECD Model Tax Convention and the expanded definition of permanent establishments result in new requirements. In particular, companies operating in Uzbekistan through commission agents or representatives must now increasingly examine whether their business structures constitute a permanent establishment within the meaning of Article 5(5) of the OECD Model Tax Convention.

The assessment of whether a permanent establishment of an agent exists is carried out in accordance with the general provisions of Art. 5 para. 1 to 4 OECD-MA and can result in a tax assessment abroad if such a permanent establishment is identified. Companies should therefore take a closer look at the applicable regulations and possible effects on their business activities.

Conclusion and recommendations

The changes to the OECD Model Tax Convention with regard to permanent establishments of representatives and the extended criteria for establishing a permanent establishment present companies with new challenges. Companies that operate internationally or conduct cross-border business in countries such as Uzbekistan should review their business models and structures with regard to the new regulations in order to avoid potential tax risks.