Permanent Establishments under scrutiny

Permanent Establishments under scrutiny

Recently, Tax Authorities across the globe have increasingly adopted local reflexes in determining the nexus of a company in order to derive proper tax that is due and payable.


The nexus of a company takes various forms such as physical place of business, the location of effective control and management, and more recently, carrying out business through a dependent agent. This in a nutshell, is the concept of a Permanent Establishment (PE).

 Permanent Establishments under scrutiny

The concept of PE is broadly defined under the Organization for Economic Co-operation and Development (OECD). The Income Tax Act in Kenya borrows its definition of a PE from the OECD.

A PE is defined as a fixed place of business in which a person/business entity carries on business for at least six months. The Finance Act, 2014, further expanded the definition of a PE to include a person’s dependent agent. A dependent agent is a person who habitually exercises authority to conclude contracts on behalf of a corporation. Even with this expansion, the definition is still not as wide as the OECD definition which also includes the fixed place of business test and dependent agent test. The concept of “fixed” under the OECD extends to include any place of business with a certain degree of permanence.

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