[Opinion] From Brick to Click | The New Geography of Permanent Establishment

Rishabh Agarwal & Ekta Manot – [2025] 180 taxmann.com 115 (Article)

1. Introduction

For decades, the concept of Permanent Establishment (“PE”) has served as the bedrock of international taxation, the legal threshold that allows a country to tax the business profits of a foreign enterprise. Traditionally, the test for a PE was physical presence – a branch, an office, a factory, or a place of management. In essence, tax nexus followed tangible footprints.

However, the global economy has outgrown geography. In an era where multinational enterprises conduct substantial business through websites, apps, and cloud infrastructure, the question arises – Can a server, a piece of metal housed in a data centre, constitute a taxable office?

What this article covers:

• How traditional PE rules were designed for a physical, location-based economy and why they are insufficient today.
• How servers, despite being intangible touch points for users, can qualify as a fixed place of business when core functions are performed through them.
• How OECD guidance, BEPS initiatives, and domestic measures like SEP are redefining nexus beyond geography.
• How courts worldwide are shaping the modern meaning of presence through critical server-related jurisprudence.
• Where cloud-based architectures further complicate the nexus test, pushing tax rules toward functional presence.

Together, these developments demonstrate a progressive shift from physical to digital taxability and provide the reader with a structured understanding of how global taxation is evolving.

The article seamlessly progresses from classical PE principles to modern digital interpretations, showing how each development logically builds upon the previous one.

2. Evolving Scope of PE – From Physical to Functional Nexus

Traditionally, establishing a PE relied heavily on physical presence and the duration and nature of activities performed in a country. Key traditional indicators of a PE included having a fixed place of business (such as an office or workshop) or engaging in substantial activities over a defined period, as seen in construction site PE duration rules.

Another critical element was the activity of agents. A presence could be established through a Dependent Agent PE, where an agent habitually concludes contracts on behalf of the enterprise, while an independent agent typically would not create a PE. The logic was straightforward – if a foreign enterprise physically operates in another country, it benefits from that jurisdiction’s infrastructure and must therefore share part of its profits through taxation.

This classical framework reflects an era when revenue generation required people, property, and physical proximity. However, with the advent of e-commerce and cloud computing, multinational enterprises began generating significant revenues from countries without physical presence.

For example, a foreign company could sell software subscriptions, stream digital content, or facilitate transactions through online platforms, all without personnel, offices, or equipment locally.

This challenged the fixed place test, since operations increasingly existed only in cyberspace.

The OECD recognised this gap and, in its 2017 Commentary, clarified how servers and digital infrastructure may constitute a fixed place of business.

3. OECD Commentary and International Consensus

The OECD’s 2017 Commentary on Article 5 explicitly addresses this issue:

A website may in itself does not constitute a place of business because it lacks a physical presence. However, the server on which the website is stored and through which it is accessible may constitute such a place if it is at the disposal of the enterprise.

The commentary further distinguishes between core and auxiliary activities:

• If the server merely hosts the website (auxiliary), no PE arises.
• If it performs essential functions (core business operations), it may constitute a PE.

This nuanced approach ensures that digital operations with substantive economic presence are taxed, while mere hosting or passive infrastructure use is not.

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