Simbarashe Hamudi
IN an increasingly globalised economy, businesses regularly operate across borders, expanding into foreign markets through branches, projects, agents, and digital infrastructure. Yet one critical question continues to shape international taxation: when does a foreign enterprise become taxable in another country? The answer lies in the concept of permanent establishment, defined under Article 5 of the OECD Model Tax Convention. This principle determines when a country has the legal right to tax the business profits of a foreign enterprise operating within its territory.
At its core, a permanent establishment is a “fixed place of business” through which the business of an enterprise is wholly or partly carried on. The OECD Model provides examples that typically qualify as permanent establishment. These include a place of management, a branch, an office, a factory, a workshop, and a mine, quarry, or any other place for the extraction of natural resources. Installations or structures used for the exploration or exploitation of natural resources are also included. Once such a presence exists, the host country may tax the profits attributable to that establishment.
The foundation of a permanent establishment is the existence of a “place of business.” For a location to qualify, it must be fixed and exhibit a degree of permanence. International tax scholars refer to this as meeting both the “location test” and the “duration test.” The location test requires a specific geographical point. The duration test requires that the business presence not be merely temporary.
Importantly, the place of business need not be visibly identifiable or permanently attached to the soil. An underground pipeline, for instance, may qualify as a permanent establishment. Equipment does not have to be bolted to the ground; it is sufficient that it remains at a particular site. The premises may be owned or rented, may consist of a market stall, or may even be located within the facilities of another enterprise. What matters is that the enterprise has a physical presence at its disposal in the host country.
However, without a distinctive place of business, no permanent establishment can arise, regardless of how long activities continue. Duration alone is not enough. The existence of a fixed geographical point remains central to the analysis. The territorial element also raises interesting questions in the digital age. For example, a satellite in geostationary orbit presents complex issues concerning territorial sovereignty. OECD member states generally disagree that a satellite can be fixed in two contracting states simultaneously. Furthermore, the area covered by a satellite’s signal the so-called “footprint” is not considered to be at the disposal of the operator and therefore does not constitute a place of business.
A permanent establishment comes into existence once the enterprise begins carrying on business through the fixed place. Time spent merely setting up the premises is excluded. Likewise, a permanent establishment ceases when the enterprise disposes of the fixed place or terminates all activities connected with it. Temporary interruptions, however, do not terminate a permanent establishment. If a fixed place is leased to another enterprise, it generally ceases to exist for the lessor unless the lessor continues to use it for business purposes.
Similarly, in the telecommunications industry, roaming agreements typically do not create a permanent establishment. When a telecommunications operator allows its customers to connect to a foreign operator’s network, it merely transfers calls and does not operate or control the foreign network. Without physical access or control over infrastructure, the necessary fixed place of business is absent. Construction and installation projects receive special treatment under Article 5. A building site or construction, installation, or assembly project along with supervisory activities constitutes a permanent establishment.
A building site is treated as a single unit if it forms a coherent whole, both commercially and geographically, even where multiple contracts are involved. Projects such as roads, bridges, canals, pipelines, and dredging works fall within this definition. Planning and supervisory activities are included if carried out by the contractor or someone closely connected to the project. The site exists from the date work begins, including preparatory activities undertaken within the country.
Article 5(4) of the OECD Model outlines important exclusions. Certain activities, even if conducted through a fixed place of business, will not create a permanent establishment if they are preparatory or auxiliary in nature. Examples include facilities used solely for storage, display, or delivery of goods; maintenance of stock for storage or processing by another enterprise; and the maintenance of a fixed place for purchasing goods or collecting information. Advertising, scientific research, and the supply of information may also qualify as exempt activities, provided they remain preparatory or auxiliary.
The decisive factor is whether the activity forms an essential and significant part of the enterprise’s overall business. There are no rigid rules; each case depends on its specific facts. Management services within a corporate group, for example, are generally not regarded as preparatory or auxiliary. Under the Zimbabwe–South Africa DTA, a PE is deemed to exist when an enterprise provides services of public entertainers or athletes in the other territory. Conversely, no PE arises merely because business is conducted through a broker or independent agent acting in the ordinary course of business.
A liaison office in Zimbabwe engaged solely in promotional activities would not constitute a permanent establishment unless it enters into negotiations with customers for the import or purchase of goods. Similarly, under certain “fix and supply” arrangements, the erection of plant or machinery does not create a permanent establishment if it forms an integral part of a supply contract and does not involve separate commercial activity. Even in the absence of a fixed place of business, a permanent establishment may arise through a dependent agent. This occurs where a person in the host country habitually exercises authority to conclude contracts on behalf of the foreign enterprise. The contracts must relate to the core business operations and bind the enterprise.
A subsidiary company is not automatically a permanent establishment of its parent. Only where its functions are integrated with those of the parent and it habitually concludes contracts on the parent’s behalf, may a permanent establishment arise.
Once a permanent establishment is established in Zimbabwe, a tax nexus arises. The enterprise must register and pay income tax and Pay-As-You-Earn (PAYE) as if it were a resident entity. It must appoint a resident representative, commonly known as a public officer, to oversee compliance. Furthermore, if the enterprise’s taxable supplies exceed USD25,000 within twelve months, it must register for Value Added Tax. Compliance obligations mirror those of domestic companies, reinforcing the principle that a permanent establishment effectively anchors the foreign enterprise within Zimbabwe’s tax jurisdiction.
l Hamudi is tax partner at Baker Tilly Central Africa, based in Harare, Zimbabwe. He can be contacted at +263 775 399 536 or simbarashe.hamudi@ bakertilly.co.zw