Tax Law Notes

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Tax Law Note:
What is Meant by the Concept of "Agent" in Tax Legislation?

Legal Department

Last Updated: December 02, 2004

In General

The concept of "agent" exists in all legal systems and involves, broadly, a person who is authorized to act in the name of another person. The rules for valid creation of an agency relationship are part of the country's general private law - either common law or the civil code. When tax laws use the term "agent" they typically do not contain an independent definition of the term for tax purposes, it being understood that the term has the meaning it has under the general private law.

Agents and Permanent Establishments

In the tax laws of most countries a non-resident that carries on business in the country through a fixed place of business is deemed to have a permanent establishment1 subject to local taxation. A permanent establishment may also be created in the absence of a fixed place of business if the non-resident carries on business in the country through a dependent agent who acts on behalf of the non-resident. A relatively standard wording for describing the concept of "agency permanent establishment" could be the respective text of the OECD Model Income Tax Treaty:2

"Art. 5 (5) ..where a person - other than an agent of an independent status to whom paragraph 6 applies - is acting on behalf of an enterprise and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

(6) An enterprise shall not be deemed to have a permanent establishment ..... merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business."

The exact wording of the rule may be different in national laws, however the concept is usually similar: a person acting on behalf of a non-resident company creates a permanent establishment for the non-resident with respect to the activities of such person if four requirements are met: (1) the person acting on behalf of the enterprise has the authority to conclude contracts; (2) this authority is habitually exercised; (3) the person is not an independent agent; and (4) the activities of this person are not limited to those expressly mentioned as activities that do not constitute a permanent establishment.

Based on the above, the critical point in deciding whether the activities of an agent create a permanent establishment in the country is whether or not he has the authority to enter into contracts that bind the principal. On this point the approaches of civil law and common law are different. The concept of agent in the OECD model is based on civil law.3 Under civil law if a principal is undisclosed, the agent cannot bind him in relation to the agent's dealings with third parties.4 Under common law, however, if an agent concludes a contract, it will bind the principal, whether if the latter is disclosed or undisclosed.5 The wording of the OECD agency permanent establishment rule (Art. 5 par.5) can be expected to be interpreted by a civil law country as referring only to cases of disclosed principals.6 In common law countries, however, the paragraph could be interpreted as covering cases of agents with both disclosed and undisclosed principals.

Additionally, under civil law an agent is necessarily a person that is independent of the entity it represents. In civil law countries, for example, the managing partner of a partnership may not be a representative of the partnership in this sense and may not constitute a permanent establishment in the absence of a physical place of business at his disposition. Under the common law interpretation, however, a managing partner may be the agent of the partnership,7 and the wording "a person acting on behalf of an enterprise" could be understood as including cases such as that of a partner or employee that is authorized to act on behalf of the enterprise.

Independent Agents

One of the requirements for persons acting on behalf of an enterprise under which a permanent establishment is created, is that they should not be considered independent agents. Even though the term dependent agent is often used as an opposition to independent agents, it is important to note, that here again, the word agent should not be interpreted strictly. Rather, in deciding whether or not an agent is independent, the focus should be on the independent nature of the agent and whether or not he is acting in the ordinary course of his own business.8 Thus, the characterization of a person acting on behalf of a company is typically based on the actual facts and circumstances of the relationship between the company and the person.9

Withholding Agents

Another common use of the term agent in tax legislation is when reference is made to the persons carrying out the task of withholding taxes and paying them to the tax authorities in respect of payments made by that person. In these cases the withholding agents are regarded as agents of the tax authorities. Here, however the scope of the persons covered and their responsibilities is always defined under the tax law itself. Thus, a potentially conflicting interpretation of the term agent under contract law does not come up as an issue here. In fact, it may not strictly speaking be accurate to refer to withholding agents as "agents" of the tax authorities; it may be better to conceive of them simply as carrying out certain obligations (to withhold and pay over taxes) that are imposed on them by law. In these cases the agents are usually referred to as "withholding agents", "tax agents" or "paying agents".

Country Practices

With respect to the definition of an agency permanent establishment most countries use language very similar to that of the OECD Model (see above).10 It is not customary to define the term agent within the tax law.

There are countries that do not at all discuss in their tax laws when a person acting on behalf of a non-resident creates a permanent establishment in the country. An example is this wording:

"Under permanent establishment... a fixed place of business is understood through which [the non-resident] fully or partly carries out its business activities, including activities carried out through an authorized person."11

In some cases the concept of a permanent establishment created by a fixed place of business and one due to an agent is used in a somewhat confusing way. Below is an example of this:

".... [a nonresident] realizes operations through a permanent establishment, when directly or through an authorized person, employee or representative owns [in national territory] any shop, or fixed place of business..."12

Fashioning a Solution

The objective of establishing agency permanent establishment rules is to define situations where, even in the absence of a physical place of business, a non-resident company that carries out activities in the country through a person located there can be seen as having sufficient economic nexus to that country to justify subjecting the non-resident company to local taxation with respect to profits attributable to the presence of the non-resident within the country.

The definition of the OECD model is based on the position that once there is a person representing a non-resident who is dependent on the non-resident and has the right to bind the non-resident and exercises this right on a regular basis, it is considered that the non-resident has such a sufficient nexus, carries on a business in the local country and should be subjected to tax on the income attributed.

In countries using a permanent establishment definition similar to that of by the OECD Model, where reference is made to a person acting on behalf of the non-resident without mentioning the term agent, it may be considered not to define the term agent and leave its interpretation open. The objective in any case is to "catch" all factual circumstances that would create an agency permanent establishment for the non-resident.

For Further Reference

OECD Model Tax Convention on Income and Capital, Commentary on Article 5, January 2003, OECD

J.F.Avery Jones and D.A.Ward, "Agents as Permanent Establishments Under OECD Model Tax Convention", British Tax Review 341 (1993)

Lee, Chang Hee: "Instability of the Dependent Agency Permanent Establishment Concept", p. 1325, International Tax Review, June 27, 2002

Klaus Vogel on Double Taxation Conventions, 3rd Edition, Kluwer Law International

Giuseppe Persico, Agency Permanent Establishment under Article 5 of the OECD Model Convention, 28 INTERTAX 66.


The series of Tax Law Notes has been prepared by the IMF staff as a resource for use by government officials and members of the public. The notes have not been considered by the IMF Executive Board and, hence, should not be reported or described as representing the views of the IMF or IMF policy.
1See Legal Department, International Monetary Fund, Tax Law Note: Definition of Permanent Establishment.
2 In the UN Model the definition of agency permanent establishment includes an additional paragraph according to which an enterprise has a permanent establishment in the local country if the agent has no authority to conclude contracts "but habitually maintains .... a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise". UN Model Double Taxation Convention Between Developed and Developing Countries, art. 5(5)(b) (2001).
3 See Klaus Vogel et al., Klaus Vogel on Double Taxation Conventions 331 (3rd ed. 1997).
4 In civil law jurisdictions there are generally two types of representations: direct and indirect. In direct representations the agent contracts in the name of the principal, legally binding him in relation to third parties. In an indirect representation the agent concludes contracts in his own name and does not bind the principal with third parties. These rule apply under Italian, Belgian, Japanese and French Commercial Codes as well as German, Swiss, Russian and Dutch Civil Codes. J.F.Avery Jones and D.A.Ward, Agents as Permanent Establishments Under OECD Model Tax Convention, British Tax Review 341 (1993).
5 Under common law only one contract comes into effect: the one between the third party and the principal. Examples are the U.S. and the U.K. See id.
6 Thus, for example in a civil law jurisdiction the reference to brokers or commissioners as examples of independent agents that do not create a permanent establishment are redundant: these persons are indirect representatives under civil law and do not have the power to legally bind their principals. See id.
7 See Vogel et al., supra note 2, at 331.
8 "Persons cannot be said to act in the ordinary course of their own business if, in place of the enterprise, such persons perform activities which, economically, belong to the sphere of the enterprise rather than to that of their own business operations." OECD Model Tax Convention on Income and Capital, Commentary on Article 5, para. 38.
9 For a detailed description of when an agent is considered independent please see the OECD Model Tax Convention on Income and Capital, Commentary on Article 5, par. 36-39, and Klaus Vogel on Double Taxation Conventions, p. 342-51, 3rd Edition, Kluwer Law International January 2003, OECD.
10 E.g. the U.S. (IRC sec. 864), Mexico (Income Tax Law, Art. 2) and several other OECD countries.
11 The original term used: "upolnomochennoye litso", Taijikistan, Sultanov, B.C.: Commentary to the Tax Code of the Republic of Taijikistan, art. 17, pp. 46-47, Dushanbe, 2001.
12 The original term used: "apoderado", Venezuela, Income Tax Law, Art. 7.


NOTE: The series of Tax Law Notes has been prepared by the IMF staff as a resource for use by government officials and members of the public. The notes have not been considered by the IMF Executive Board and, hence, should not be reported or described as representing the views of the IMF or IMF policy.


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