Brazil: The Traditional Concept Of Permanent Establishment And The New Economy – The Position Taken By The OECD And The Issues Faced By The Brazilian Tax System

Last Updated: 9 July 2003

Roberto Greco de Souza Ferreira1

With the development of the Internet and the growth of e-commerce transactions, many legal questions have emerged, including tax issues surrounding this new form of conducting business.

In most circumstances, transactions over the Internet never take place in a physical location, but rather in an almost untouchable world – cyberspace. For example, to what extent does the existence of a computer server located in a foreign jurisdiction constitute a permanent establishment for the purposes of applying bilateral tax treaties? Should the fact that a website in which the residents of a foreign jurisdiction have access, and even conclude transactions, trigger taxation in the that jurisdiction due to the existence of a permanent establishment?

The purpose of this paper is to examine whether the traditional permanent establishment principles can be extended to e-commerce transactions, focusing on the view of the Organisation for Economic Co-operation and Development (OECD) and the challenges faced by the Brazilian legal system.

The Traditional Concept of Permanent Establishment

The concept of permanent establishment is extremely important for relieving double taxation in cross-border activities. According to this concept, a non-resident doing business in a foreign jurisdiction only will be taxed in that jurisdiction to the extent that he carries out activities through a permanent establishment. More importantly, the profits arising from such activities must be attributable to this permanent establishment. The concept of permanent establishment, however, only comes into effect when there is a bilateral tax treaty between two countries.

A permanent establishment is "a fixed place of business through which the business of an enterprise is wholly or partly carried on."2 It includes a place of management, a branch, an office, or a factory; all of them having a physical location with a certain degree of permanence.3 In some circumstances, a permanent establishment also may exist by imputation of the activities of certain agents.4

Based on the theory of realization, in which a company’s profits are not directly attributable to the existence of any physical installation in the foreign jurisdiction, there are some exceptions to the concept of permanent establishment. These exceptions generally involve activities of preparatory or auxiliary character, including, for example, storage, display or delivery of goods, gathering of information, and advertising.5

Permanent Establishment and E-commerce - The Position Adopted by OECD

Applying the traditional concept of permanent establishment to the new economy, the OECD released an opinion related to the definition of permanent establishment in the context of electronic commerce.6 The following are the relevant conclusions:

  • In principle, a computer server, which is a piece of equipment, meets the fixed place of business requirement. Therefore, it may constitute a permanent establishment in the country where it is located even though the server does not require human intervention.
  • Although a computer server is tangible personal property and has a physical location, it may be relocated. To constitute a permanent establishment, the server must remain in a certain location for a sufficient period of time.
  • A website viewed alone cannot constitute a permanent establishment due to its intangible nature.
  • A computer server that operates a website may fit into the definition of a permanent establishment since it has physical characteristics. Accordingly, if a non-resident conducts business through a website and also operates the server (owning or leasing the server) on which the website is stored, he may have permanent establishment in the tax jurisdiction in which the server is located.
  • If the operator of the server is not the non-resident that maintains the website, but rather an Internet service provider, there is no permanent establishment because the Internet service provider is not an agent of the non-resident. Except in rare circumstances, the Internet service provider has no authority to negotiate contracts on behalf of the non-resident.
  • A computer server does not constitute a permanent establishment to the extent that it performs activities of preparatory or auxiliary character. These activities include advertising, supplying information, gathering data, and providing a communications link. Activities such as concluding the contract with the customer and processing payment and delivery are not of preparatory or auxiliary character, and therefore may cause a permanent establishment to exist in a foreign jurisdiction.

The Legal Issues Faced by the Brazilian Tax System

Although Brazil is not a member of the OECD, in most cases it follows the OECD Model Tax Convention. Nonetheless, Brazil does not necessarily have to follow the OECD guidelines, especially the OECD view on the definition of permanent establishment in the context of electronic commerce. Although bilateral tax treaties prevail over Brazilian domestic law,7 interpretation of tax treaties signed by Brazil belongs exclusively to domestic law.

Brazilian tax authorities have not yet released an opinion concerning the OECD standpoint relating to the definition of permanent establishment in the context of electronic commerce. This lack of official guidance is attributable to the following:

Brazil does not have detailed regulations that would clarify the majority of tax issues regarding electronic commerce. Although the government has created a federal organ to coordinate all legal issues that arise in the electronic commerce environment, no guideline has been issued regarding whether a computer server or a website may constitute a permanent establishment.8

Brazilian domestic law has not developed a detailed concept of permanent establishment to tax the business profits of a non-resident doing business in Brazil. Traditionally, non-residents have established their presence in Brazil either by owning legal entities or by having a dependent agent who has the authority to act on behalf of the non-resident in Brazil. Under domestic law, these ways of conducting activities lead to a taxable presence in Brazil similar to any Brazilian resident.9 In the absence of tax treaties, non-residents doing business in Brazil, without establishing a legal presence in Brazil, are taxed on gross income. Brazil does not have a mechanism for taxing non-residents on net income, such as the "effectively connected income derived from the conduct of a trade or business" mechanism used by the U.S. Government, which takes into account revenues and expenses when taxing net income.

Although Brazil lacks a set of rules concerning what constitutes a permanent establishment, the law requiring the existence of a fixed place of business (ownership of Brazilian legal entities) or a dependent agent (binding the non-resident to establish a taxable presence in the Brazilian jurisdiction), can be interpreted in the context of electronic commerce. Accordingly, a website viewed alone cannot constitute a fixed place of business, and therefore cannot constitute a permanent establishment. However, depending on the circumstances, a computer server can fit into the traditional concept of permanent establishment.

Taking into account the foregoing domestic scenario, and applying the traditional rules of permanent establishment, the Brazilian tax authorities will most likely follow the OECD opinion related to the definition of permanent establishment in e-commerce transactions. Therefore, under Brazilian law, a website alone will not constitute a permanent establishment. Nevertheless, depending on the facts and circumstances of each case, a computer server, which has a physical location, may constitute a permanent establishment.


1 The author is an associate with Stroeter, Royster & Ohno Advogados, associated with Steel Hector & Davis LLP.

2 OECD Model Tax Convention on Income and on Capital (Apr. 29, 2000), art. 5(1), at

3 Id. at art. 5(2) and 5(3).

4 Id. at art. 5(5).

5 Id. at art. 5(4).

6 OECD Committee on Fiscal Affairs, Clarification on the Application of the Permanent Establishment Definition in E-Commerce: Changes to the Commentary on the Model Tax Convention on Article 5 (Dec. 22, 2000), at

7 See National Tax Code [C.T.N.], Lei No. 5.172, de 25 de outubro de 1966, D.O.U. de 27.10.1966, art. 98.

8 See Comitê Executivo de Comércio Eletrônico [Executive Committee of Electronic Commerce], Portaria Interministerial MDIC/MCT/MPOG No. 47, de 3 de agosto de 2000, D.O.U. de 8.09.2000.

9 See Regulamento do Imposto de Renda [Income Tax Regulations], Decreto No. 3.000, de 26 de março de 1999, D.O.U. de 29.03.1999, art. 147, II, III.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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