Anti-fragmentation Rules
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Anti-fragmentation rules, also known as anti-avoidance or anti-abuse rules, are provisions included in double taxation conventions to prevent taxpayers from artificially splitting their business activities to avoid having a permanent establishment (PE) in a particular jurisdiction.
Under the Organisation for Economic Cooperation and Development Model Tax Convention, the concept of permanent establishment is crucial for determining the taxing rights of a country over business profits. A permanent establishment refers to a fixed place of business through which an enterprise carries out its business activities. It can include various forms, such as a branch, office, factory, workshop, or agency.
However, some taxpayers may attempt to fragment their business activities across different entities or locations in order to avoid creating a permanent establishment in a country where they would otherwise have a significant presence. By avoiding a permanent establishment, they seek to minimise or eliminate their tax obligations in that jurisdiction.
To counter such practices, anti-fragmentation rules have been incorporated into double taxation conventions. These rules aim to attribute the activities and profits of related entities or parts of an enterprise together, treating them as a single integrated business operation. This prevents taxpayers from circumventing the creation of a permanent establishment by artificially dividing their operations.
Anti-fragmentation rules typically allow tax authorities to disregard the legal separation of entities or the contractual arrangements between them when determining the existence of a permanent establishment. Instead, they consider the substance and economic reality of the business operations. If it is determined that the separate entities or arrangements are essentially part of a cohesive business operation, the tax authorities may treat them as a single entity for tax purposes.
By implementing anti-fragmentation rules, double taxation conventions aim to ensure that taxpayers cannot exploit artificial structures or arrangements to avoid their tax obligations in a jurisdiction. These rules help maintain the integrity of the permanent establishment concept and prevent abuse of tax treaties for improper tax planning purposes.
Under the Organisation for Economic Cooperation and Development Model Tax Convention, the concept of permanent establishment is crucial for determining the taxing rights of a country over business profits. A permanent establishment refers to a fixed place of business through which an enterprise carries out its business activities. It can include various forms, such as a branch, office, factory, workshop, or agency.
However, some taxpayers may attempt to fragment their business activities across different entities or locations in order to avoid creating a permanent establishment in a country where they would otherwise have a significant presence. By avoiding a permanent establishment, they seek to minimise or eliminate their tax obligations in that jurisdiction.
To counter such practices, anti-fragmentation rules have been incorporated into double taxation conventions. These rules aim to attribute the activities and profits of related entities or parts of an enterprise together, treating them as a single integrated business operation. This prevents taxpayers from circumventing the creation of a permanent establishment by artificially dividing their operations.
Anti-fragmentation rules typically allow tax authorities to disregard the legal separation of entities or the contractual arrangements between them when determining the existence of a permanent establishment. Instead, they consider the substance and economic reality of the business operations. If it is determined that the separate entities or arrangements are essentially part of a cohesive business operation, the tax authorities may treat them as a single entity for tax purposes.
By implementing anti-fragmentation rules, double taxation conventions aim to ensure that taxpayers cannot exploit artificial structures or arrangements to avoid their tax obligations in a jurisdiction. These rules help maintain the integrity of the permanent establishment concept and prevent abuse of tax treaties for improper tax planning purposes.
