News Details


Revision to Permanent Establishment (PE) Definition

List of news

1. Introduction
The 2018 Japan Tax Reform has revised the definition of a permanent establishment (PE). In this News, we will focus on the revised definition of the so-called “Agent PE.”

2. Current PE Definition
PE is a fixed place of business (branches and other related places) where the business of an enterprise is wholly or partly carried on.  If a foreign enterprise without a PE operates business in Japan, the business income is not subject to corporate income tax in Japan. (“No taxation without PE”)
PE is classified as follows:

   1) Fixed Place PE (a branch, office, factory, and other related places)
   2) Construction PE (installation or assembly projects where a foreign company carries on for a period of over one year)
   3) Agent PE (contract concluding agent, order fulfilling agent, order securing agent)
   ※ Independent agent (An agent who is independent from a foreign enterprise and acts in the ordinary course of its business) is not deemed an Agent PE.

3. Artificial avoidance of Agent PE status
An artificial avoidance of PE taxation by using the so-called commissionaire agreements has been a serious problem in Japan.
Under the commissionaire agreements, an agent sells products in its own name but on behalf of a foreign principal, whereas the profit from sales is attributed to the foreign principal. Since the principal maintains the ownership of the products, the agent is taxed only on the commissionaire fee for its services in Japan.
Therefore, comparing with the ordinary buy-sell transactions, the commissionaire agreements enable foreign enterprises to lower the inventory risk and reduce the income which is subject to corporate income tax in Japan.

4. Revised Agent PE definition
In line with the BEPS Reports and the revised OECD Model Tax Convention, Japan domestic tax law has amended the Agent PE definition as follows:

① Where “a person habitually concludes contracts for the business of a foreign enterprise or a non-resident individual (“non-resident”) or habitually plays the principal role for concluding certain contracts and these contracts are with regard to the transfer of ownership of the non-resident’s assets”, the person will be added to the definition of Agent PE.

② The independent agent exemption will exclude “the person who exclusively or almost exclusively acts on behalf of its one or more closely related parties (more than 50% of shareholding or de facto controlling relationship).” That is, in order to be treated as an independent agent, the person needs to carry on business not only with its closely related parties but with third parties.

5. Conclusion
In this News, we mentioned “Revision to Permanent Establishment (PE) Definition”, focusing on Agent PE.  Please note that this News only introduces general outlines and does not include professional advice. So please make sure not to make any decisions without taking professional advice individually. If you have any questions, please feel free to contact us.

Ministry of Finance
(Accessed on June 26, 2018)