6.2.3.3 Defining jurisdiction to tax (art. 5 OECD MTC)

Viewing subsidiaries within the unitary business as permanent establishments would lead to the question: when does a subsidiary exist (i.e., which entities should be viewed as permanent establishments)?1 In the current framework this would follow from art. 5 OECD MTC. The permanent establishment article could thus still serve as an important element in the allocation of taxing jurisdiction under a unitary business approach. If there is a sufficient economic nexus in a certain country, irrespective of whether there would be a physical permanent establishment or not, there would have to be a taxable presence for domestic and tax treaty purposes. As described in par. 6.2.2.4, this could be designed via a factor presence test as a quantitative alternative for the permanent establishment. The exact definition of sufficient economic nexus would require further research.

The various rules that are currently included in art. 5 OECD MTC, such as the closely related enterprise concept and the provision that makes sure a subsidiary is not automatically a permanent establishment of its parent company, would all become redundant if a group approach would be applied.