1 Zimmer Case PE

8/14/2019 1 Zimmer Case PE

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A Note on the Zimmer Case and theConcept of Permanent Establishment

J. Clifton Fleming, Jr.

I. Introduction

II. Electivity

III. Potential Impact on Other Jurisdictions

IV. Conclusion


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A Note on the Zimmer Case and the Concept of Permanent Establishment

I. Introduction

The facts and holding of theZimmercase have been clearly stated and analysed

in the preceding paper by Stephne Gelin. Thus, it is sufcient in this paper tomerely say that Zimmer SAS was a French commissionaire whose sole activitywas selling the products of Zimmer Ltd, a UK company, into France. ZimmerSAS had no inventory. Its activity was limited to soliciting and negotiating orderswhich became binding contracts between Zimmer SAS and the French customersbut which were not legally binding on Zimmer Ltd.

The French Conseil dEtat held that(1) Zimmer SAS was not a French PE ofZimmer Ltd. under the dependent agent provisions of Article 5.51of the France

U.K. income tax treaty (substantially identical to the OECD Model) because

French domestic law governing commissionaires provided that sales contracts

which Zimmer SAS made were not legally binding on Zimmer Ltd. and (2) Zimmer

SASs French place of business was not a PE of Zimmer Ltd under the generic

provisions in Article 5.12 of the Treaty (substantially identical to the OECD

Model) because Zimmer SAS was carrying on its own business, not Zimmer Ltd.s

business, in France.3

II. Electivity

The language in Article 5(1) suggests that a taxpayer has a PE whenever objective

criteria are satised and that there is no element of taxpayer choice. TheZimmerdecision, however effectively allows a taxpayer selling into France to choosewhether to avoid a French PE or to have a French PE merely by electing to eitherdistribute its goods in France through a commissionaire or through a dependent

agent who makes contracts that are binding on the foreign seller.4 In terms of

1 5. Notwithstanding the provisions of paragraphs 1 and 2, where a person other than anagent of an independent status to whom paragraph 6 applies is acting on behalf of an en-terprise and has, and habitually exercises, in a Contracting State an authority to concludecontracts in the name of the enterprise, that enterprise shall be deemed to have a per-manent establishment in that State in respect of any activities which that person under-takes for the enterprise, unless the activities of such person are limited to those mentionedin paragraph 4 which, if exercised through a xed place of business, would not make thisxed place of business a permanent establishment under the provisions of that paragraph.

2 For the purposes of this convention, the term permanent establishment means a xedplace of business through which the business of an enterprise is wholly or partly carriedon.

3 For commentary, see L.A. Sheppard, Narrowing Permanent Establishment, Tax Notes131(2011): 343; N. Ayme, Commissionaire Arrangement Not a PE, Supreme Court Says,Tax Notes International 58(2010): 112.

4 For example, a taxpayer who has losses from certain activities in a source country mightwish to operate a separate protable activity through a PE in that country in order to makeuse of the losses for source country tax purposes and then might wish to convert the sepa-rate activity to a non-PE operation once the losses have been used up.


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economic substance, the difference between these two approaches is virtuallymeaningless but the Conseil dEtat has given them dramatically different conse-quences and left the taxpayer free to choose between those consequences.

There is a suggestion in the Conseil dEtatsZimmeropinion that if the foreignseller regularly performs the contracts negotiated by the commissionaire, then thelatter could be held to de facto legally bind the foreign seller and constitute a PE.But the Conseil dEtat was unwilling to use this approach to nd a French PE in

Zimmer even though Zimmer Ltd apparently accepted and performed virtually allof the contracts negotiated by Zimmer SAS. Consequently, it seems difcult tobelieve that a French commissionaire will ever be held to create a French PE inany signicant number of cases. Since foreign sellers have virtually unlimitedlegal freedom to choose between a commissionaire structure that does not create

a PE and a dependent agent with contracting authority that does create a PE, theexistence or not of a French PE is now largely an elective matter.

III. Potential Impact on Other Jurisdictions

It is tempting to regard theZimmeroutcome as a result that is conned to Franceand to other civil law countries whose domestic law authorizes the commissionairestructure. This temptation should be resisted because Article 5(5) of the OECDMC seems to allow a foreign seller to avoid having a PE in any source country ifthe foreign seller acts through either an independent agent in the source country

or through a source country dependent agent who solicits orders that do not be-come binding contracts until accepted by the foreign seller. One can argue that theindependent agent structure is so different from the commissionaire structure thatthe two are not comparable. I would reply that in terms of economic substance,the difference between these two arrangements is insignicant but for the present,I will pass over that debate in order to focus on the dependent agent structure.

The economic differences between a commissionaire arrangement and a lim-ited dependent agent that has authority to obtain orders that do not become le-gally binding until accepted by the foreign principal are truly insignicant. Most

importantly, Article 5(5) of the OECD MC seems to provide that both structuresprevent the foreign seller from having a PE in the source country. Thus, in countrieswhose domestic law does not contain the commissionaire form of organization,there is a strong argument that foreign sellers can effectively achieve the commis-sionaire result (no PE) by selling through a limited authority dependent agent thatis thoroughly controlled by the foreign seller but that merely solicits orders that donot become binding contracts until accepted by the foreign seller.5And because

5 There have been a few cases holding that the activities of an agent can constitute a PE withrespect to a foreign principal even if the agent has no authority to enter into binding con-tracts in behalf of the principal. See Italy, Court of Cassation, 9 Apr. 2010, No. 8488;F. Zimmer, Norwegian Court Sides with Tax Authorities in Dell, Tax Notes International


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A Note on the Zimmer Case and the Concept of Permanent Establishment

the difference between a dependent agent who lacks the authority to enter intobinding contracts (no PE) and a dependent agent who has such authority (a PE) isapparently totally controlled by the language that the foreign seller chooses to

include in the agency contract, the issue of PE or not would seem to be as fullyelective in non-commissionaire countries as in commissionaire countries.Granted, paragraph 32(1) of the OECD Commentary says that a dependent

agent will be deemed to legally bind the foreign seller where the latter routinely

approves the contracts procured by the limited authority dependent agent. How-ever, it would seem that this problem can be avoided by the foreign seller reservingreal discretion regarding orders procured by the agent, such as where the foreignseller does the credit investigation of the customer instead of delegating thatfunction to the dependent agent. Thus, it seems likely that foreign sellers can use

the limited authority dependent agent to create substantially the same results innon-commissionaire countries that they can obtain in France after the Zimmerdecision.6

Of course, an agents place of business can be a PE of the principal if theprincipals business is conducted through the agents business location by meansof the agents activities.7However, in Zimmer the Conseil dEtat held that theagent was carrying on its own business as a commissionaire through its activities,not the principals business. It would seem that the same conclusion would applyto a dependent agent that acted through its own ofce facilities and employees andwas adequately compensated for its work.8

61 (2011), 991; Sheppard, supranote 3. These decisions, however, appear to be outliers.The general understanding is that agent activity can create a PE only when the agent is de-pendent and has, and habitually exercises, authority to make contracts that legally bind theprincipal. See OECD Commentary on Art. 5, paras 31, 32, 32(1), 35; US Treasury Depart-ment, United States Model Technical Explanation Accompanying the United States ModelIncome Tax Convention of 15 Nov. 2006, Art. 5(5).

6 Of course, this conclusion assumes that the cases referred to in footnote 5 remain outliersand are not followed in a substantial number of commercially signicant countries.

7 OECD Commentary on Art. 5, para. 10, states: The business of an enterprise is carried onmainly by (personnel). This personnel includes employees and other persons receivinginstructions from the enterprise (e.g. dependent agents). The powers of such personnel inits relationship with third parties are irrelevant. It makes no difference whether or notthe dependent agent is authorized to conclude contracts if he works at the xed place ofbusiness.However, this language is not applicable when the dependent agent is carryingon its own business of being an agent in facilities that it has procured for itself. For thisreason, the Conseil dEtat held that Zimmer SASs ofces were not a place of business ofZimmer Ltd. If mere dependency were sufcient to make a dependent agents premises theprincipals premises also, then Art. 5(5)s requirement that the agent have the authority toenter into binding contracts would be relevant only to dependent agents that lacked anofce. While Art. 5(5) clearly applies to such agents, there is nothing that suggests that it islimited to such agents. See OECD Commentary on Art. 5, paras 31, 32.

8 See OECD Commentary on Art. 5(42), which states:Whilst premises belonging to a companythat is a member of a multinational group can be put at the disposal of another company


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IV. Conclusion

A strong argument can be made that the Conseil dEtatsZimmerdecision is not a

peculiarity of French law but is instead a French manifestation of the broaderpoint that under Article 5(5) of the OECD MC, foreign sellers are free to avoidPEs in all source countries, including France, by selling through source countrydependent agents that lack the authority to enter into contracts that legally bindthe foreign seller.

For those who believe that source taxation is a bad thing, these observationsare good news. But those, like myself, who favour robust source taxation will seethe preceding analysis as an additional reason why the PE concept contained inthe OECD MC provides an unsatisfactory basis for setting the threshold at whichsource taxation becomes applicable to business income.

of the group and may, subject to the other conditions of Article 5, constitute a permanentestablishment of that other company if the business of that other company is carried onthrough that place, it is important to distinguish that case from the frequent situation where acompany that is a member of a multinational group provides services (e.g. managementservices) to another company of the group as part of its own business carried on in premisesthat are not those of that other company and using its own personnel. In that case, theplace where those services are provided is not at the disposal of the latter company and itis not the business of that company that is carried on through that place. That place can-not, therefore, be considered to be a permanent establishment of the company to which theservices are provided. Indeed, the fact that a companys own activities at a given locationmay provide an economic benet to the business of another company does not mean thatthe latter company carries on its business through that location.

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1 Zimmer Case PE