Permanent establishment taxation: profits attributable to a PE may be taxed in the source State under arm's length attribution rules.

Business profits are taxable in the residence State except where an enterprise carries on business through a permanent establishment (PE) in the other State; profits attributable to the PE may be taxed in that other State. Attribution follows an arm's length principle treating the PE as a separate independent enterprise based on functions, assets and risks. The UN version extends source taxation to sales and similar activities in the source State, allows deduction of actual PE expenses, and disallows non reimbursement charges between PE and head office such as royalties, commissions and most interest.

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