Document Library

Many African countries have reported that a large number to Drafting Permanent Establishment Legislation of non-resident enterprises carry on business activities in their country without establishing a legal entity in the country. This can lead to significant loss of tax in that country if it does not have domestic legislation in place that effectively taxes the profits the non-resident enterprise earns from those business activities. Where a country taxes on a full source basis it taxes all income, whose source is in the country irrespective of the residence of the recipient. For example, where resident taxpayers are taxed on their worldwide income irrespective of whether derived from the residence country or from outside the residence country (and given credit for foreign tax payable) and non-residents are taxed on all income which source is in the country. The taxation of the non-resident’s income may however be restricted if there is a tax treaty with the contracting state of the non-resident. Treaties generally provide that the business profits of a non-resident enterprise are taxable in a country only to the extent that the enterprise has in that country a permanent establishment to which the profits are attributable.