Permanent establishment profit attribution limits source taxation to profits attributable to the PE under separate-entity principles.

Profits are taxable in the resident State unless business is carried on through a permanent establishment in the other State, in which case only profits attributable to that permanent establishment may be taxed there. Attribution follows the separate enterprise principle, allowing deductions for expenses incurred for the permanent establishment subject to local tax law, but excluding non-reimbursement payments between head office and permanent establishment such as royalties, fees, commissions, management charges and, except for banks, interest. Customary apportionment is permitted if consistent with these principles; mere purchase of goods does not create attributable profits, and the chosen method should be applied year to year.

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